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Tesla (TSLA) to Make Inroads Into India With Nod to 4 Vehicles

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Tesla Inc. (TSLA - Free Report) is set to hit the Indian roads soon with the Union transport ministry approving four of its models for production or import in the country.

Four vehicle variants of Tesla passed the homologation phase and are ready to be rolled out in the Indian market.  Homologation is a process that certifies if a particular vehicle is roadworthy after meeting all the specified criteria.

A post on the Indian government’s motor vehicle portal — Homologation Vahan Seva — confirms the same. Per the website, the tests conducted on the vehicles ensure that they meet the requirements of the Indian market in terms of emission, safety and roadworthiness.

Though it is still not clear which four models received a green signal from the Indian authorities, it is being speculated by Tesla fans that it could be Model 3 and Model Y variants, which were spotted regularly on the Indian roads for testing. Also, the launch date for the vehicles in the country is yet to be revealed.

Tesla is famous for doing in-house production of primary components used in cars including the battery pack, charger and the electric motor. However, it outsources other parts from third-party suppliers. Reportedly, for its India debut, Tesla is in discussion with the three Indian auto component suppliers, namely Sona Comstar, Sandhar Technologies and Bharat Forge for providing components to the electric vehicle (EV) behemoth in the nation.

Riding the EV Wave in India

Amid the heightening climate-change concerns, it became imperative for several countries to resort to the green modes of transportation. However, the EV market in India is at a nascent stage, with EVs accounting for only 1% of the country’s annual sales.

Nonetheless, the Indian government set a target to reduce carbon emissions by 30-35% within 2030 as well as cut down on crude oil imports in the nation to bring about a green revolution. India plans to achieve this goal with the electrification of two-wheelers, three-wheelers and commercial vehicles.
The government intends to kick-start an era of EVs by electrifying 30% of private cars, 70% of commercial cars, 40% of buses and 80% of two- and three-wheelers by 2030. The administration also initiated incentivizing with an aim to boost the EV market. Moreover, the technical skills of the country along with its low-manufacturing costs and easy availability of components make the EV space an attractive platform for future investments by auto bigwigs around the world.

Tesla revolutionized the EV domain the same way as Amazon changed the retail landscape and Netflix transformed the environment of entertainment. Tesla is undoubtedly the undisputed global leader on the EV front. It has always expressed its interest in expanding into the India auto market.

In January, Tesla officially commenced its operations in the country by establishing a fully-owned subsidiary in Bengaluru named Tesla India Motors and Energy Pvt Ltd. This created a massive buzz among the Tesla fans and put an end to their years of speculation, confirming the automaker’s long-awaited entry in India.

However, the country's high-tax regime poses a major hurdle to the EV launches by foreign automakers. Tesla CEO Elon Musk claims that import duties in India are among the highest in the world and the nation treats clean-energy vehicles the same as gasoline-powered vehicles, which is not in line with its climate goals.

California-based Tesla’s vehicles will take an imported route for its initial innings in India and therefore be subject to high-import duties.  This will make the vehicles very expensive for the Indian public. While the premium income group will rush to buy the luxurious Tesla car as a symbol of prestige, the car will be relatively high priced for the average Indian buyers and might not appeal to them much.

This raises the question of how fruitful and impactful the India debut will be for Tesla. The EV market in India is currently dominated by the more budget-friendly EVs. How Tesla manages to get acceptance from this price-conscious market and become a mainstream offering here is a question that remains unanswered as of now.  

Thus, Musk requested the Indian government to slash the steep import duties on vehicles, which will allow the EV maker to put a cheaper price tag on its cars.

Another challenge to the India EV market is the lack of adequate charging stations. Reportedly, there are currently just 250 public-charging stations in operation around the country. The EV sector in India cannot boom without proper and sufficient EV charging infrastructure in the country. Also, lack of financing for companies wanting to develop electric cars is another reason why India is way behind in the electric transition.

Tesla is betting on the India EV market, keeping in mind that the short-term return is likely to be low. Nonetheless, with Tesla likely to unveil a low-cost EV model in the coming years as well as the India market maturing and adapting itself to the needs of being fully electric, Tesla may achieve more lucrative returns in the long term.

If the company is able to capitalize on its brand name and convert its fanfare into tangible demand in India, it is set to ride the trending EV hysteria in the nation and create a niche market for its products there. In fact, Musk had earlier said that the company could also end up establishing a manufacturing plant in India if the response is good but at present, it would first test the market with imported vehicles.

Tesla, peers of which include General Motors (GM - Free Report) , Ford (F - Free Report) and Volkswagen (VWAGY - Free Report) currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.