Will India become a dumping ground for Chinese EVs following the EU and US’ rise in tariffs?

The US and EU have implemented some major tariffs on Chinese EVs, in a bid to protect their domestic auto industries.

President Joe Biden announced substantial increases in tariffs on Chinese-made goods, particularly targeting EVs. The tariff on Chinese EVs has risen dramatically from 25 per cent to 100 per cent. Additionally, tariffs on Chinese lithium-ion batteries have increased from 7.5 per cent to 25 per cent. This move aims to shield the US market from the influx of competitively priced Chinese EVs.

Similarly, the European Union (EU) has taken action. Starting in July, the EU will impose extra duties of up to 38.1 per cent on imported Chinese electric cars. The European Commission is also considering how to address Chinese subsidies, proposing additional tariffs that could raise the total duty on Chinese EVs to nearly 50 per cent. These measures are designed to protect European manufacturers, many of whom produce vehicles in China and are affected by these tariffs.

Historically, India has been the dumping ground for Chinese electronics and other products whenever the EU and the US have rejected them. In the case of EVs though, things are a little different.

The Chinese threatThe surge of Chinese electric vehicles (EVs) into the global market has caused significant concern in the United States and Europe. These regions, known for their stringent automotive standards and competitive markets, are wary of the high-quality yet affordable Chinese EVs, and for good reason. Earlier this year, Tesla CEO Elon Musk highlighted the threat, asserting that without trade barriers, Chinese EVs could overshadow most other car companies globally.

The heightened tariffs in the US and EU raise concerns that India might become a dumping ground for Chinese EVs. Historically, Chinese electronics, especially those that failed to penetrate US and European markets, have found a market in price-sensitive India. While the EV market, particularly for four-wheelers, may differ, vigilance is necessary to prevent a similar scenario.

China’s dominance in the EV sector is not coincidental. Initially, the US led the EV market, largely due to companies like Tesla. However, over the past five years, China’s EV industry has seen exponential growth, outpacing the US.

Currently, China accounts for about 60 per cent of global EV sales and controls a significant portion of the EV supply chain, including critical components like lithium-ion batteries. Reports indicate that China holds 85-95 per cent of the production capacity for major battery components and around 70 per cent of global lithium refining capacity.

China’s strategic investment in EV technology began in 2001 with a research and development program focusing on batteries, motors, and other related technologies. A decade later, China introduced generous subsidies to promote domestic EV purchases, ensuring that imported EVs did not qualify for these benefits and faced tariffs. Local content requirements for manufacturing subsidies further boosted domestic production.

Beyond economic gains, China’s EV push addresses environmental and strategic concerns. The adoption of EVs helps reduce air pollution in urban areas and mitigates climate change, especially if China decreases its reliance on coal-fired electricity. Furthermore, EVs reduce China’s dependency on imported oil, which constitutes about three-quarters of its consumption—a higher dependency ratio than the US experienced even at its peak.

Threat to IndiaChina’s robust EV ecosystem and substantial production capacity present a significant threat to established markets in developed countries. With its nascent EV industry, India could become a target market for Chinese EVs, along with regions like Europe, Latin America, and Southeast Asia.

Stellantis, the world’s third-largest carmaker based in Amsterdam, which owns brands such as Chrysler, Citroën, Fiat, and Jeep, is considering the local manufacturing of affordable electric vehicles (EVs) from its Chinese joint venture partner, Leapmotor, at its facility in Thiruvallur, Tamil Nadu, as per a report by The Economic Times. Stellantis already manufactures EVs under the Citroën badge in Thiruvallur.

As India takes its initial steps in developing its EV sector, careful monitoring and strategic planning are crucial to navigating the influx of Chinese EVs and fostering a sustainable and competitive domestic EV market.

India’s new policy announced on March 15 aims to boost investment in the local manufacturing of high-end electric cars. The government of India will allow the import of CBU electric cars that have a minimum cost, including insurance, and freight value of $35,000 or about Rs 30 lakh at an import duty of 15 per cent. This will be applicable for a period of five years if the manufacturer sets up a factory in India with an investment of at least $500 million

Lessons from the smartphone IndustryChinese smartphone makers disrupted the Indian smartphone manufacturing landscape through a combination of aggressive pricing, rapid innovation, and strategic market penetration.

Leveraging China’s robust manufacturing ecosystem, companies like Xiaomi, Oppo, and Vivo were able to produce high-quality smartphones at significantly lower costs than Indian manufacturers.

This cost advantage allowed them to flood the Indian market with affordable, feature-rich devices, which quickly gained popularity among price-sensitive Indian consumers.

Moreover, Chinese brands employed smart marketing strategies, including extensive online sales, partnerships with e-commerce platforms, and significant investments in retail infrastructure. They also introduced frequent product launches with cutting-edge technology, which kept Indian competitors struggling to keep up with the rapid pace of innovation.

Moreover, they started buying up manufacturing units in the country through their Indian subsidiaries. Additionally, the use of aggressive promotional campaigns and endorsements by popular celebrities helped in building brand recognition and consumer trust rapidly.

Indian manufacturers, on the other hand, faced challenges such as higher production costs, limited R&D capabilities, and slower adoption of new technologies. This disparity in operational efficiency and innovation led to a decline in market share for Indian brands, ultimately crippling their ability to compete. Consequently, Chinese smartphone makers became dominant players in the Indian market, effectively sidelining domestic manufacturers.

With EVs though, things won’t be as easy for Chinese players. Having learnt their lessons from Chinese smartphone makers and how they decimated a budding smartphone manufacturing industry, India is likely to be better prepared. Moreover, Chinese smartphone makers had one major advantage — they did not have to face an established, Indian smartphone maker. In the case of EVs, things are slightly different.

The players in the Indian EV marketIndia’s EV market, although small, is growing rapidly. In 2023, passenger vehicle sales grew by 10 per cent year-on-year, while EV sales nearly doubled. Despite this growth, EVs only account for 2 per cent of total passenger vehicle sales in India compared to nearly 38 per cent in China.

Currently, Tata Motors dominates the Indian EV market, accounting for just over two-thirds of the market share. Mahindra & Mahindra, BYD, and MG Motor are emerging players. Mahindra in particular, has seen a staggering increase of over 2400+ per cent with just one EV in its portfolio in 2023.

Meanwhile, Maruti Suzuki, India’s largest carmaker, is yet to enter the EV space, Tesla is also expected to arrive by the end of the year.

India preparedIndia’s EV ecosystem is still in its nascent stage and is dependent on government policy incentives attracting various players Reliance, Ola and Exide to set up EV battery manufacturing units. However, it will take several years for India to develop a local ecosystem to significantly reduce EV prices.

In a situation like this, Chinese EV makers can leverage their own ecosystem for expertise and components while manufacturing in India, giving them a competitive edge over Indian rivals.

However, because of the geopolitical tensions between India and China, the Narendra Modi-led Indian government will do just about everything to stop the influx of cheap Chinese EVs to Indian shores.

The Indian government has introduced regulations which allow the government to go through foreign investments with a fine-toothed comb. The objective is to find links to neighbouring countries, namely China and Pakistan and see if potential investments could potentially be detrimental to national securities.

The Narendra Modi-led NDA government has used these regulations to keep Chinese EV-makers at bay. Back in 2023, the government of India famously blocked BYD from setting up a factory in India at an investment of over $1 billion.

The Indian EV market is projected to grow rapidly. Counterpoint Research expects EV sales to constitute one-third of total passenger vehicle sales by 2030. Needless to say, this presents a massive opportunity for all the players in India’s EV market, and sets for them, a hotly contested market.