The localisation story of Elon Musk's Tesla: India versus China deal

The Tesla factory in China, on the other hand, sources 95% of its components locally after 5 years

The new electric vehicle policy of the government offers some key terms which seem to be more attractive for car makers than what Tesla was able to extract from China when it set up its plant in Shanghai in 2019. 

Under the new policy, India has offered a localisation term of reaching a domestic value addition (DVA) of 25 per cent in three years and 50 per cent in 5 years from the date of issue of the approval letter.
 

In China, on the other hand, 95 per cent of their components used in the plant is sourced locally, thereby creating a large Chinese component supply base. When they started out rolling out cars in December in 2019, about one-third of the components were from China. 
 

Tesla had an agreement with, for instance Panasonic to provide them with lithium ion batteries, but in China, it went to Chinese battery manufacturer CATL for most of its requirements. It has a contract with CATL, now the world’s largest battery maker, till 2025.

Tesla has also acquired companies in the US, Germany, and Canada and has brought them to China for crucial areas of technology. And it has signed up for land to manufacture cobalt-free lithium ion phosphate batteries with its partner. 
 

Car makers which manufacture in India and are eligible under the production- linked incentive (PLI) scheme for electric vehicles have to begin with a DVA of 50 per cent.  An auto veteran who has run global car companies in the country,  says: “Companies like Tesla and others have been given a long rope in India. There is no reason why they cannot start manufacturing cars at 50 per cent localisation, as India has a huge high-quality component industry which is exporting to the world. Everything, except the battery cells, is available. In three years they should have gone to 80-90 per cent.”  

The policy has also cut import duty from 60-100 per cent to only 15 per cent on cars with a CIF (cost, insurance and freight) value of over $35,000 for 5 years, although it has given companies three years to set up a manufacturing plant in the country with a minimum investment of $500 million. In China Musk had requested two years to set up the plant, but was asked to cut it to one year. And he delivered. The construction of the plant started in January 2019 and production began in October 2019. It committed to invest $2 billion in five years and the Shanghai government offered land at one-tenth the market rate.   
 

That said, the Chinese have given many other sops to Tesla. For example, earlier, China had a strict  policy of allowing only joint ventures with Chinese companies for making cars. But to help Tesla it dropped the rule in 2018 so that Musk’s firm could come as a fully-owned subsidiary.
 

Tesla was also able to lobby and get China to change its emissions policy. Now, the firms that make clean cars get carbon credits which they can sell and make money. This has provided Tesla with substantial incomes.  
 

Moreover, China’s state-run banks provided loans to the tune of $1.5 billion to the company at low interest  rates. 

In 2019 TesIa’s annual report stated that much of the funding for the giga factory would come from loans arranged through Chinese financial institutions. It was also able to skirt strict labour laws and the government made it easier for Tesla to work more shifts in its factory.

Ride in China

Construction of factory in Shanghai completed in under a year

Has already reached 95% localisation in components. Started with one- third in 2020

Was given land at one-tenth the market price by Shanghai Municipality. Tesla committed $2 billion in five years 

China scrapped its rule of permitting only 50-50 joint ventures with Chinese players

Provided low interest loans from banks to Tesla for constructing the factory