Tesla's India entry: Why Tamil Nadu has an edge over others — and why it may not matter

CHENNAI: There are vehicles and electric vehicles, and then there is Tesla.

For years, several Indian states have been trying to catch the eye of billionaire businessman Elon Musk to hard-sell themselves as the perfect location for Tesla to set up its manufacturing unit in the country.

These include Tamil Nadu, the original hub of automobile manufacturing in India, to other industrialised states like Maharashtra, Gujarat, Andhra Pradesh, and Karnataka among others.

However, despite the overtures, the Tesla CEO has been playing it cool, citing many reasons.

In 2022, Musk had said that Tesla, which was earlier seeking a reduction in import duties to sell its vehicles in India, would not manufacture its products here unless it was allowed to first sell and service its cars in the country.

Import duties slashed

Before that, in August 2021, he had said Tesla may set up a manufacturing unit in India if it succeeded with imported vehicles in the country.

He had said Tesla wanted to launch its vehicles in India “but import duties are the highest in the world by far of any large country!”

The bump on the road was the basic customs duty on luxury EVs priced over $40,000, which was 110%. But all that changed in just a few months.

In a series of orchestrated moves, the Union Budget slashed the customs duty to 70%. And then came PM Narendra Modi’s meeting with Musk in the US during a recent visit after Donald Trump became President.

Soon afterwards, the EV major began recruitment in India for roles such as service advisor, parts advisor, service technician, service manager, sales and customer support, store manager, business operations analyst, customer support supervisor, customer support specialist, delivery operations specialist, order operations specialist, inside sales advisor, and consumer engagement manager.

Many see this as a precursor to the beginning of manufacturing in India, which is sure to bring back the race among states to attract Musk with more offers, incentives, and discounts.

Tamil Nadu’s edge

Having attracted auto majors including Hyundai, Benz, BMW, Mahindra, Ford, Nissan, Renault, and others many years ago, Chennai earned the moniker, Detroit of South Asia.

Other than these legacy behemoths, Chinese EV major BYD has an assembly unit in Irungattukottai, where it makes vehicles by importing components. More recently, Tata Motors and Vietnam’s VinFast have begun works on their promised investments in excess of Rs 25,000 crore, which will boost production capacity to 4 lakh vehicles and would also expand the auto hubs from Chennai to other parts of the State.

Other than four-wheelers, Tamil Nadu also has Indian electric vehicle major Ola’s Future Factory.

Srivats Ram, chairman, CII Tamil Nadu State Council, and MD-Wheels India, said, “Over the years, TN has been able to attract multiple auto manufacturers, and has a strong auto components manufacturing base as well. Tamil Nadu has a legacy of attracting overseas investments in the auto sector specifically. On the electronics and EV front, Tamil Nadu is one of most developed states in the country. Plus, it has robust sea ports and airports, which are crucial for global supply chain management. So, the State is well poised to attract Tesla.”

Speaking to DT Next a few months ago when it emerged that a team of senior executives were coming to India to scout for locations, a senior State government official said that TN has two advantages — an automotive ecosystem and competitive advantage.

Tamil Nadu is strong in component manufacturing and availability of skilled manpower, strengths that are further accentuated by the presence of three major ports — Chennai Port, Kamarajar Port, Ennore; and VOC Port, Thoothukudi — that is a major consideration for firms that are eyeing exports.

Another official who was part of two such State government delegations that met leading automobile firms across the world – including a visit to Tesla’s first plant in Sunnyvale, California, way back in 2017-18 — said the company was not prepared to enter India, as the country was not perceived as a mature market for EVs. Instead, it was looking at China and Germany as potential sites to set up its manufacturing units. The idea behind these visits was to ‘seed’ the thought of evaluating Tamil Nadu as a potential destination, the person had told this newspaper.

In September 2019, the then CM Edappadi K Palaniswami visited Tesla’s factory in San Francisco and invited the company to invest in Tamil Nadu. The photos of a blazer-clad EPS posing with a swanky, bright-red Tesla during that visit is now being circulated again to claim a share of the credit if Tesla indeed lands here.

Joining the excited discussions about Tesla’s unit in India, investor and popular commentator on social media, D Muthukrishnan, cited several stats to pitch for Tamil Nadu, including that south India accounting for 60% EV sales in the country.

Tagging Elon Musk on social media, Muthukrishnan noted how Chennai is home to nearly one-third of India’s automobile industries and 35% of automobile components industry, has three operational ports, and Tamil Nadu is the leader in automobile exports.

“Most importantly, 40% of all electric vehicles sold in India are made in Tamil Nadu. The state has the best ecosystem in India for EVs. Please consider south India. Please consider Tamil Nadu,” he said.

Reasons don’t matter

As important as an existing, mature ecosystem is for big companies when picking the perfect site for their next manufacturing unit, it is only one of the several considerations when taking that call. The decision is pegged on many factors, mainly financial and also political, as we have seen in recent times.

The financial decision involves not only traditional, clear factors like logistics, present market size and future potential, but also the incentives that the suitor states offer. The fiercer competition there is between the states, the more companies can negotiate a bargain. This is not just limited to India.

In a February 2022 story, the Financial Times detailed how various states in the US were pulling out all stops to attract big auto manufacturers to set up an EV base in their states. For instance, Michigan, considered to be the capital of the US auto industry, adopted a $1.5 billion bill to expand subsidies, including for EV production. Soon, General Motors announced an investment of $7 billion to convert its plant to make EVs and also set up a battery unit.

The report said the company would receive $824 million incentives. Similarly, Ford announced plans for plants in Tennessee and Kentucky, and received $1.3 billion in incentives.

While State governments promote such subsidies in the name of job creation and money circulation helping the economy, critics point out that each job cost the exchequer $1,60,000 to $2,10,000 per job in Michigan, $1,00,000 in Tennessee, and $60,000 in Kentucky.

Back in India, the incentives are wide-ranging, from waivers in excise, duty, taxes, and other levies, to housing schemes for workers — all coming from the exchequer.

Union government’s pull

Equally or perhaps more important is the political pulls, nudges, and prodding by the Centre-ruling BJP to ‘divert’ investments to the states where it is in power on its own or as part of the National Democratic Alliance that it heads.

A highly-placed State government official told DT Next that discussions with Tesla were halted when the presidential election was announced in the US.

“Ideally, if Tesla were to target the export market, then Tamil Nadu must be their natural choice. If they are looking to tap the domestic market, Tesla might pick Maharashtra. But, it would be a shocker if they choose any state other than TN or Maharashtra. It would mean there was a strong political push from somewhere within the country.”

Admitting that the State government has been negotiating hard to get Tesla to set up shop in TN, preferably, Chennai, the source pointed out that Chennai already has a robust infrastructure and automobile manufacturing ecosystem in place.

“As a leader, TN can definitely match contender states in terms of offering incentives to woo any investor. However, a company like Tesla will not get influenced by political lobbying or incentives; instead it takes decisions based on its requirements. Tamil Nadu government will leave no stone unturned to woo a big ticket project like Tesla.”

Besides Tamil Nadu, the states that are vying to attract Tesla are Gujarat, Maharashtra, and Andhra (BJP in power in 3).

There are others like Karnataka and Telangana, both ruled by Congress. Even within the NDA-ruled states, Gujarat is the frontrunner for all high-profile investments and industries.

Among the states that allegedly suffered because of the Centre’s aggressive efforts to bring big-ticket industries to PM Modi’s home state Gujarat is Maharashtra, where the NDA is in power. When Shiv Sena leader Eknath Shinde was the CM, four projects that entailed massive investments and job opportunities went to Gujarat. Of these, Tata-Airbus aircraft manufacturing plant and Vedanta-Foxconn chip-making unit were apparently supposed to be set up in Maharashtra.

However, things are different now, as BJP’s poster boy Devendra Phadnavis is back as the CM, partner Shinde Is cut to size, and rivals have been decimated in the Assembly polls. After winning the elections, Phadnavis now has to show why he is best suited to pilot Maharashtra’s re-emergence as the industrial powerhouse.

Meanwhile, the Economic Times reported that Andhra’s Economic Development Board has renewed its pitch with Tesla, highlighting advantages like readily available land parcels and port connectivity. What is not said — but is clearly understood — is that the State now has an NDA government headed by CM Chandrababu Naidu, who always projected himself as the CEO of the State.

Unlike the past, the BJP is marginally short of a simple majority in the Lok Sabha and is thus dependent on TDP’s support. And Naidu is a shrewd operator, who had stayed away from the first NDA cabinet headed by AB Vajpayee (except cornering the Lok Sabha Speaker post for GMC Balayogi) and leveraged that to ensure a steady and healthy flow of aid and investments to the then undivided Andhra Pradesh.

Considering the various factors at play, though Tamil Nadu is a frontrunner when it comes to any new investment in electric vehicle manufacturing, the road to Tesla deal is a congested alley.