Tesla (Nasdaq:TSLA) maybe looking to expand in India. The Indian government recently urged the automaker to setup its Asian manufacturing hub in the country and offered it strategically located land near the subcontinent’s major ports. Tesla didn’t outright decline the offer but said that it would evaluate the proposal depending upon the sales performance of the Model 3 in India. It’s worth noting that the automaker has shown interest in setting up a manufacturing plant in India earlier as well. So in this article, let’s examine the prospects of Tesla’s potential expansion in India and see if it would make a smart move on automaker’s part. 

Flickr

Opportunities For Tesla

• Let me start by saying that India has one of the lowest wage rates for skilled and unskilled workers across the globe. The chart attached below adds clarity to the fact that India’s manufacturing-related labor costs about 75% less than that in China. The latter itself is known for cheap labor rates internationally, so if we put things in perspective, India offers dramatically cheaper workforce for industrial plants and manufacturing facilities. This stark pricing differential single-handedly provides enough incentive, at least on paper, for companies, startups and entrepreneurs to setup their manufacturing facilities in India.

(Source)

• It’s worth considering that India has some really well-positioned trade routes. Several major manufacturing firms have shifted their operations from Thailand and Indonesia over to India due to its relatively shorter sea-bound transit time to European and other neighboring Asian markets. For instance, exporting a product to Europe via merchant ships takes about 22 days from Mumbai (India), 28 days from Bangkok (Thailand) and 26 days from Jakarta (Indonesia). At the end of the day, shorter transit times increase inventory turnover ratio while also reducing freight expenses.

• We’ve mentioned this point already but the government’s incentive to offer land at strategic locations near major Indian ports is kind of a big deal. The company will be able to import equipment/parts and export fully built units with minimal channel lag. It would make Tesla’s Indian operations leaner and more efficient due to reduced inventory commute times. And the best part, Tesla won’t have to shell out a premium for these locations as it would be a government incentive.

• Also, setting up a manufacturing hub in India could boost the domestic demand for its vehicles significantly. Currently importing fully built vehicles in India attracts a huge 125% tax. This means that an $80,000 Model X or $35,000 Model 3 could cost as much as $180,000 and $78,750 in India, respectively. So setting up a manufacturing plant in India would bypass the problem of skyrocketing import duty loads and it could make Tesla more competitive on a price-basis.

Challenges For Tesla

Now that we’ve examined the rosy picture, let’s take a look at some of the very-real challenges that Tesla could face in India.

• India may have a huge market for automobiles, but the demand for Tesla cars may still be muted. The Indian market is generally geared towards down-market offerings as the country is still a developing nation with per-capita income about 97% lower than in the U.S. To put things in perspective, about 6 million passenger cars were sold in India during 2015, while sales of luxury cars in the country aggregated to approximately 35,300 units over the same period. So the demand for Tesla cars in India may not be sizable by any means or scale.

• Also, the demand for electric vehicles hasn’t been that encouraging over the past few years. There have been a number of EV launches in the past, which include Mahindra’s Reva, but none of them turned out to be blockbuster success stories.

• Moreover, Tesla will also have to tie up with Panasonic to locally produce its lithium ion car batteries and paywall units. The real problem is that India doesn’t have any proven lithium reserves and setting up such a plant would mean importing the commodity from markets abroad. Further, India doesn’t appear to have any trade agreements relating to importing lithium with any nation, so the cost of importing the commodity could be substantial if freight charges and import duties are factored in. So essentially, if the government doesn’t subsidize or nullify duty on lithium imports, battery manufacturing costs could surge and that might throw a wrench in Tesla’s prospective plans of setting up an ambitious Asian manufacturing hub in India.

Investor Takeaway

Granted that Tesla’s prospective expansion in India sounds like a good move on paper, but we have to understand that there are a few limitations that would curtail the automaker’s growth in the country. From frequent power outages to a miniscule luxury market for automobiles, India just doesn’t seem like a right fit for Tesla at the moment. Maybe over the next 4-5 years, but not now. It doesn’t make a strong business case for Tesla to expand in India as things stand.