India is seen as a market with very good demand growth potential for automakers, especially premium brands; local assembly of CKD kits avoids high import tariffs

India is seen as a market with very good demand growth potential for automakers, especially premium brands; local assembly of CKD kits avoids high import tariffs

Last weekend, a chief minister for Karnataka, India seemingly confirmed via a since-deleted tweet that Tesla will open its first Indian factory in the city. This revelation comes in the wake of an announcement from Tesla's CEO Elon Musk that the company was in talks with several Indian states to explore the possibility of opening an office, showroom, R&D centre or possibly a factory in the country.

Tesla's decision to move into the Indian market is driven by the fact that, as the second-most populous country in the world after China, the potential addressable market there is vast. GDP per capita is still lower in India than in China or western nations but it is accelerating rapidly and leading to a growing middle class looking to flex its newfound wealth.

Premium vehicles are expensive in India, with models such as the Mercedes C-Class and Audi A4 costing much more to buy than they do in the US. Driving the price difference is a 28% general sales tax and 20% road tax applied to combustion-powered vehicles, pushing on-the-road prices far above the vehicles' base prices. OEMs including Audi, BMW, Mercedes and JLR have all set up local Indian production to get around the country's high import duties, but India's premium market still only hovers at around 40,000 units per year.

Assembling vehicles locally like rivals means Tesla would be able to get around India's high import taxes, but the fact its range is made up of electric vehicles means general sales tax is reduced to 5% and road tax is waived completely. This would lower the purchase price significantly – rough calculations by the unofficial Tesla Club India put the on-the-road price of an imported Tesla Model 3 at $67,000 while the OTR price of a locally produced Model 3 would be closer to $48,000, potentially bringing it within reach of India's middle classes.

If these rumours are true, a question remains over what kind of factory Tesla might build in India. The most likely candidate at this stage is a complete-knock-down assembly facility – one where knocked-down 'kits' of pre-made Tesla components are shipped off to the assembly facility and then built up into the finished vehicle. Industrial policy in India means that, for foreign firms setting up local vehicle assembly, at least 70% of a vehicle's content must be Indian sourced, meaning Tesla would probably have to establish local supply of various components for this operation.

Currently, the Indian government levies customs duty of 30% for semi-knocked-down vehicle kits for local assembly but, if assembling EVs from completely knocked-down kits, that figure drops to just 15%. As a result, it would make the most financial sense for Tesla to operate a complete knocked-down operation. If Tesla can drive premium sales in India, it may reach 50,000 sales per year – the presumed threshold where transitioning to completely built unit production in India would be more profitable than kit assembly. However, if Tesla is exploring an Indian operation on that scale, it is likely that it would be considering exporting assembled vehicles from India to other nearby markets.

A hypothetical Indian Tesla factory could begin by assembling affordable versions of existing Tesla models such as the Model 3 or Model Y. Alternatively, it could assemble a newly created model more specifically targeted to the Indian market such as a compact hatchback with a smaller battery pack to bring the price down. Such a model has already been proposed for European markets and would probably perform well if it was sold in Indian and Chinese markets too.