Storm in a Tesla Cup and Clues We Can Take From China
Elon Musk’s recent comments on the challenges Tesla Inc faces in India have sparked an outpouring of excitement in the country, with politicians of various hues jostling to roll out a red carpet to welcome the world’s most valuable automaker. world in their respective states with overwhelming and unlimited promises of support and concessions. What has been disconcerting about this wave of investor-friendly flattery is the fact that most of these politicians have failed to be one iota of consistent about the quality of investments they seek from Tesla. , and the nature, justification and scope of the incentives which they are willing to provide. While a high-profile deal with a big-name investor can be a valuable tool for political signaling, unless these investment deals are skillfully crafted, they are unlikely to deliver on the promise of creating a “ electric vehicle hub”, on which they are based.
Despite doubts about the net carbon impact of electric vehicles (EVs), given that they use energy that might or might not be cleanly generated, they are widely seen as the vanguard of technological change. that is sweeping the global automotive industry. Their development is also likely to generate several positive externalities that could transform mobility as we know it. Therefore, cultivating a robust and well-developed electric vehicle industry is a laudable and necessary goal of our industrial policy.
However, this goal cannot be achieved through investments in import-dependent assembly plants with minimal local sourcing, as Tesla plans to do in India, according to multiple reports. The development of a viable domestic electric vehicle industry would require the wide dissemination of technical know-how and the development of an ecosystem of local component suppliers that could be tapped by other domestic automakers to compete with Tesla in the market for electric vehicles. electric vehicles.
Tesla has invested in China, and the Shanghai deal with Tesla offers a classic model of how a “carrot and stick” investment policy can lead to the development of a powerful electric vehicle ecosystem. When China entered into negotiations with Tesla, its local market was plagued with low-quality electric vehicles (mostly hybrids) with limited capabilities. Chinese decision makers were clear about how they wanted to use Tesla. The US-based company is expected to develop Shanghai as an export hub and source locally. They estimated it would kill three birds with one stone. Not only would this boost exports, but it would also make local component suppliers more competitive and help them acquire sophisticated manufacturing know-how. Finally, Tesla would pressure other local manufacturers to improve their standards and act like the proverbial aggressive catfish that forces other fish in the pond to swim faster. To achieve this, Tesla received lavish incentives, including cheap land, low-cost loans, grants, tax breaks and 100% factory ownership (a first in China where all foreign automakers need national partners). There was also a lot of stick. For example, Tesla would have to invest at least $2 billion over 5 years and start paying Chinese taxes of at least $323 million from 2023, otherwise Tesla would lose its factory to the Chinese government.
China’s strategy has yielded phenomenal results. Shanghai is now Tesla’s largest and most important manufacturing plant. It sources 86% of its components domestically, compared to 73% for the California plant. Local equipment manufacturers have acquired extraordinary technical expertise, such as the LK group, which developed the world’s largest casting machine for Tesla. And the catfish effect has led to a deluge of new and more sophisticated models from local automakers, making China the electric vehicle mecca of the world.
This brings us to why Tesla is now keen to enter India with imports instead of local manufacturing. A large part of the Shanghai factory’s production is exported to the EU. With Giga Berlin (Tesla’s German factory) and Giga Texas on the anvil, Giga Shanghai will no longer be needed to export products to the EU. Additionally, Tesla faces fierce competition (and market share erosion) in China from established players like BYD as well as newcomers like Nio. With the tax breaks expiring in 2023, Tesla will also be forced to set competitive prices for its output from the Shanghai factory. That’s why he wants to use his Shanghai factory to export to other Asian countries, including India, and is pushing for lower import duties instead of incentives to manufacture locally.
Indian policy makers and various politicians should be aware that domestic manufacturing is essential for the country to take advantage of our growing demand for cars and develop new production capabilities. Even free-market economies like the United States under radical free-traders like President Ronald Reagan hammered Japanese automakers with quotas and tariffs to force them to manufacture vehicles in the United States.
India should also use Tesla as a catalyst to set off a chain reaction that transforms domestic EV manufacturing, instead of giving up our vast market for myopic political gains. Indian politicians right now should bargain hard for a Giga Ludhiana, Giga Hyderabad, Giga Kolkata, Giga Bengaluru or a Giga Chennai, instead of serenading Elon Musk with ballads of unrequited incitement and promises to indefinite period.
The first Tesla (Nikola) is said to have said, “A new idea should not be judged by its immediate results. A new investment either.
Diva Jain is a director at Arrjavv and a “probabilist” who researches and writes on behavioral finance and economics. Her Twitter handle is @DivaJain2
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