India is potentially on the cusp of becoming a major global player in vehicle production. Whether it can achieve this status will become clear in the next couple of years. The transition to EVs adds to the national challenge as the domestic players are not really leaders in this sector. Meanwhile, the Indian EV supply base is nascent and dependent on foreign investors.
All three Indian domestic vehicle manufacturers, Maruti (a joint enterprise with Suzuki), Tata and Mahindra & Mahindra, are investing heavily in new factories or expansion of existing operations. Mahindra’s expansion is, intriguingly, part funded by the UK government’s British International Investment unit which is part of the Foreign Office. There are also several international players with manufacturing operations in India, but only Hyundai-Kia and Toyota (in a JV with local company Kirloskar) operate at scale. Renault-Nissan, Volkswagen-Skoda and Honda have had disappointing recent performances in the domestic market and are only now pushing ahead with exports.
”Tesla and VinFast are in the running for all-new EV factories in India and government incentives may well prove to be decisive here” – Ian Henry
GM has long exited from the country, but Ford – which still makes engines for global supply in India – is considering a return to vehicle production, albeit for export. The Chinese are absent from the manufacturing scene and geopolitics means it is unlikely that they will begin production in India any time soon. Tesla and VinFast are however in the running for all-new EV factories in India and government incentives may well prove to be decisive here.
India no stranger to imposing tariffs
India allows vehicle companies to import EVs at significantly reduced tariffs rates subject to commitments to open manufacturing facilities within three years and reaching certain revenue thresholds in subsequent years; failure to meet these targets would mean any reduced tariffs or other benefits would be subject to clawback by the government. The Indian government, moreover, has proved itself highly willing to take on global car companies on tax issues, especially concerning tariffs. Currently, Volkswagen faces a US$1.4 billion claim because it allegedly paid the wrong tariff rate on component imports for over a decade. Kia faces a smaller claim, of US$155m, for a similar alleged transgression. Volkswagen has said that the scale of the fine imperils its long-term commitment to country; at more than 100 times its operating profit in India for last year this is understandable, the fact that Volkswagen may not have played by the rules notwithstanding.
“The Indian government also has ambitions for its automotive manufacturing sector to increase its export ratio, to as high as 50% by 2030” – Ian Henry
The government currently offers incentives for the purchase of electric two- and three-wheelers and for commercial vehicles, but not for electric cars. It will likely come under pressure to offer incentives to purchase electric cars. However, for now it is focusing its efforts elsewhere. For example, it has exempted key minerals – such as cobalt – involved in the production of EV batteries from tariffs and exempted machinery to make batteries from tariffs. This is all designed to encourage the development of the infrastructure to produce batteries in India.
Boosting vehicle exports
The Indian government also has ambitions for its automotive manufacturing sector to increase its export ratio, to as high as 50% by 2030. How realistic this is will be determined by the growth rates achieved in what are still regarded by many as emerging markets; Saudi Arabia, the UAE and the Gulf states in general, plus South Africa, will be key in this regard. Selling Hondas and Suzukis to Japan will be optically good for the country but such programmes will be unlikely to be especially high-volume activities. Indian cars have always been marginal sellers in Europe (although they may become more common in the EFTA market following the India-EFTA trade deal) and almost entirely absent from the USA. That is unlikely to change.
India will also hope for the economic isolation of Russia to come to an end; Skoda models made in India sold well in Russia before the Ukraine invasion. While Indian-made Skodas are still sold to markets neighbouring Russia, like Kazakhstan, the Indian vehicle manufacturing sector would undoubtedly benefit from the potential re-opening of the Russian market in the years ahead. The Chinese may, however, already have stolen a march on India, with the likes of Chery and Geely having taken over several Russian plants previously operated by European and Japanese companies who exited Russia following the invasion of Ukraine.
Big ambitions for the future but challenges remain
As much as US$40 billion has been announced for investment in the Indian vehicle manufacturing sector for the next decade, along with investment in battery production and the wider EV supply chain. Government support is available, partly through reduced or zero tariff schemes subject to specific investment thresholds and timetables being met. India may become the global automobile player which the government wants but the reality of geopolitics and, crucially, the strength of competitor nations in supplying into some of India’s key target markets may prevent India’s vehicle manufacturing sector fulfilling its own or the government’s ambitions.
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