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Global electric car manufacturer Tesla, which is to start sales in India soon, is in talks with multiple Indian carmakers to explore the option of entering into a contract manufacturing arrangement in the country, according to industry sources. The US carmaker has initiated preliminary discussions with multiple automakers in India operating below full capacity to explore potential manufacturing partnerships.
Sources familiar with the developments have revealed that Tesla has approached a Japanese automaker and an Indian carmaker to explore the possibility of utilising their spare capacity. The talks are still in the early stages, and a final agreement will depend on mutually beneficial commercial terms being reached.
Meanwhile, sources say that the first Tesla model will be imported as a completely built unit, and the US company does not want to set up a greenfield operation in India in the first year itself.
If Tesla finalises a contract manufacturing deal with an Indian automaker, it would be the first such endeavour for a U.S. carmaker.
The decision to explore contract manufacturing was reached after the company gave some thought to the other option – setting up a local manufacturing plant under GoI’s proposed EV policy of the Indian government. However, this policy requires a minimum investment of $500 million in capacity to secure a lower 15% import duty on cars, capped at 8,000 units per annum.
Tesla’s preference for a contract manufacturing approach over a traditional greenfield investment aligns with its strategy of reducing capital expenditure and achieving a quicker time-to-market. Amid slowing growth and a significant capacity glut around the world, the company does not want to open an additional manufacturing front to cater to a market. Globally, Tesla has an installed manufacturing capacity of 2.5-3.0 million units across the United States, Germany, and China.
Geopolitical developments may have also influenced the decision not to go for local manufacturing initially. Donald Trump recently took over as the president of the United States of America and has been on an aggressive campaign to promote manufacturing in the US by levying high tariffs on goods produced in other countries. He has singled out India for its high import duties on vehicles, which makes it difficult for US vehicle makers to ship products to India. Industry experts say, given that a lower duty is on the anvil, it does not make sense for Elon Musk to set up a factory in India. Instead, it will likely focus on brand-building and sales infrastructure, ensuring it reaches its target consumer efficiently.
Indian EV Market
According to a source close to the development, Tesla plans to soon test the waters in India’s highly competitive and cost-sensitive market. The average selling price (ASP) of cars in India is around $11,000, compared to $40,000 globally.
Tesla has the option of sourcing batteries from its gigafactory in Germany for its India operations and is likely to initially introduce its Model 3 and Model Y, with on-road prices expected to exceed Rs 40 lakh ($45,000). These models will cater to the premium segment, positioned right in between the mainstream car market up to Rs 40 lakh and the luxury car market that starts at around Rs 50 lakh, where brands such as Mercedes-Benz, BMW, and Audi operate.
Despite the growing interest and market activity, India’s EV penetration remains low, accounting for only 2.5% of the total passenger car sales in February 2025. Limited charging infrastructure and the challenge of making EVs practical for daily use continue to slow adoption.
The annual sales volume of premium carmakers in India with a price above Rs 40 lakh is approximately 80,000 to 85,000 units, with luxury carmakers accounting for a little over 50,000.
Meanwhile, India already has surplus production capacity. India’s total capacity stands at 6.2 million vehicles, but actual production is 4.6 million, resulting in an average capacity utilization of 75%. However, individual manufacturers experience significant variation in utilisation rates, with some operating at less than 45% while major players maintain levels above 85%.
If Tesla proceeds with contract manufacturing in India, it could boost the utilization of struggling automakers, validate premium EV demand, accelerate charging infrastructure development, and, in the long run, encourage more localization of EV components. With Tesla’s plans still in early negotiations, the industry awaits further developments that could reshape India’s EV landscape.
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