PM Modi’s big bet on Elon Musk in India might just work

The Indian government is a big believer in the transformative potential of a single large investor. On March 15, the government announced a new scheme to promote investment in EVs.

By Mihir Sharma

Elon Musk’s long courtship of Indian officialdom may have finally paid off. Prime Minister Narendra Modi wanted him to open one of his Tesla “gigafactories” in the country, as part of its efforts to expand its long-moribund manufacturing sector; Musk, meanwhile, wanted India to address tariffs on electric vehicle imports that rendered foreign-made Teslas uncompetitive.

On March 15, the government announced a new scheme to promote investment in EVs. Any company willing to invest Rs 4,179 crore ($500 million) in a new manufacturing facility that begins production in three years (and with at least a quarter of its components added locally, to begin with) will also be allowed to import 8,000 high-end vehicles a year at a lower tariff of 15 per cent.

It’s generally assumed that this quid pro quo will be enough to get Musk - and, hopefully, one or two other companies, like Vietnam’s Vinfast Auto Ltd. - to bite. Certainly, the EV producers that currently dominate the Indian market are already bracing for competition.

On the one hand, this looks like business as usual. Officials have made a habit of using the supposed potential of the domestic market as an inducement for foreign investors.

The stick of high tariffs together with the carrot of possible consumer demand growth should be enough to lure in people like Musk, they think.

That said, there’s a deeper story to be told here. Size matters: The Indian government is a big believer in the transformative potential of a single large investor. Officials expended enormous amounts of energy wooing Apple Inc.

They were ultimately successful, and now think an entire mobile phone manufacturing ecosystem will grow up around Foxconn Technology Co.’s factories in south India. For the past few years, they’ve been working to convince Taiwan Semiconductor Manufacturing Co. to do the same. It’s an anchor investor strategy: Get a whale like Musk in, and the minnows will follow.

If Apple and Tesla are both putting hundreds of millions into backing the India story, it is something of a statement about the country’s business environment, right?

This isn’t the first time governments have tried this, of course. China famously waived its domestic ownership requirements to get Tesla to open a gigafactory in Shanghai. That seems to have paid off: Tesla says that over 95 per cent of the parts that factory uses come from local suppliers.

And Musk’s claim that he couldn’t invest big in a country that didn’t allow him to get enough cars on the ground first did have a certain logic. Importing vehicles to begin with allows you to start creating a charging infrastructure, for example. That in turn grows the domestic market enough to justify the investment you make in local production.

There’s a lot more that India could do to help this trend along. For example, EV makers who take up this offer should be encouraged to invest in interoperable charging. Land is scarce, and finding space for multiple different kinds of EV charging stations would otherwise be a nightmare.

Tesla does have an advantage when it comes to making deals like this: Its business model stresses vertical integration. That’s why its factories are giga-sized, after all. It’s easier for them to make promises about localization since they have greater control over their supply chains than their competitors do.

How will local companies deal with new entrants into India’s EV market? The optimistic take here is that companies like Tata Motors Ltd., if they’re worried about competition from the Teslas of the world now that tariffs have come down, should argue more strenuously for lower trade barriers all round.

That’s the only thing that would keep them competitive, given their more expansive supply chains. The automobile sector needs to become the loudest voice in favor of trade deals like the ones the country is currently negotiating with the UK and the European Union.

Manufacturing will only take off when the business climate really improves — when tariffs are low and stable, and regulators are as welcoming to smaller companies as they are to whales.

India’s big bet on big companies may pay off. This is clearly where its industrial policy is going now: relying on trusted foreign partners to transform entire sectors. But you ask, can you trust Tesla with a task of this magnitude?

Or, in particular, Elon Musk, given his history of missed deadlines and impulsive business decisions? The government may have bet on Tesla, but it’s not taking any chances, either.

Any company choosing to take India’s deal will also have to put up a bank guarantee in case it fails to follow through on its promises of investment and local sourcing. Trust, but verify bank details first.