EU-India pact redraws vehicle production parameters

The 27 January announcement of a free trade agreement between the European Union and India represents more than diplomatic theatre. For automotive manufacturers, it marks a significant recalibration of production strategy in the world's third-largest vehicle market, where tariffs have historically reached 110% and component duties have made European presence prohibitively expensive.

Described by both EU Commission President Ursula von der Leyen and Prime Minister Narendra Modi as the "mother of all deals," it ends nearly two decades of on-and-off talks that first began in 2007.

What distinguishes this accord from previous trade negotiations is not merely its scale but its surgical precision. The agreement establishes quota-linked tariff reductions that descend from current levels to 10% over several years, applying to 250,000 vehicles annually priced above €15,000 ($18,000). More critically for manufacturing operations, component duties face complete elimination within five to ten years. This creates an entirely different equation for production planners weighing local assembly against import strategies.

Read the article:

Geopolitics and shifting investment plans reshape 2026 automotive strategy

Component economics drive manufacturing decisions

The elimination of component tariffs addresses what has long been European manufacturers' primary impediment to expanding Indian operations. Current duties of up to 44% on machinery, 22% on chemicals and 16.5% on completely knocked down kits have forced a binary choice between full localisation and minimal presence. Zero-duty components fundamentally alter this calculation, enabling graduated manufacturing strategies where European suppliers can feed India-based assembly operations without punitive costs.

The European Automobile Manufacturers' Association has explicitly identified components as the agreement's most significant manufacturing benefit, noting that finished vehicles inevitably attract political sensitivities whilst ancillary parts enable technology transfer and supply chain integration. For manufacturers like Volkswagen, already operating facilities at Chhattrapati Sambhaji Nagar, or Mercedes-Benz, which has begun local assembly of its Maybach GLS specifically for the Indian market, duty-free components permit sophisticated manufacturing models that blend European engineering with cost-competitive Indian production.

India exported automotive components worth $22.9 billion (£18.6 billion) in the previous financial year, with Europe absorbing 29%. The agreement's rules of origin provisions require substantial processing in either jurisdiction to qualify for preferential treatment, incentivising European manufacturers to deepen supply relationships with Indian component specialists. This creates investment opportunities in EV batteries, power electronics and wiring systems, where Indian suppliers can serve both domestic production and European export requirements.

Strategic quotas protect whilst opening markets

The quota mechanism demonstrates considerable sophistication in managing competing manufacturing interests. India's 250,000-unit annual allocation for European vehicles exceeds the 37,000-unit quota granted to the United Kingdom by nearly sevenfold, reflecting the EU's substantially larger automotive industrial base. Crucially, manufacturers receive reciprocal access, with India securing duty-free entry for up to 625,000 vehicles into EU markets, calibrated to reflect relative market sizes.

This asymmetry serves distinct purposes. European manufacturers currently hold less than 4% of India's 4.4 million annual unit market, dominated by Suzuki Motor and domestic manufacturers Tata Motors and Mahindra & Mahindra. The quota permits European producers to test premium segments without committing to large-scale local manufacturing whilst simultaneously encouraging such investment by limiting duty benefits beyond quota thresholds. An Indian commerce ministry official articulated the strategy plainly, stating manufacturers exceeding quotas should establish Indian production facilities.

Electric vehicle treatment reveals a particular nuance. Battery EVs face exclusion from duty reductions for five years, protecting investments by Mahindra & Mahindra and Tata Motors in India's nascent electric sector. Post-exclusion, imports split between 160,000 internal combustion engines and 90,000 EVs annually. This phased approach acknowledges that whilst India's EV manufacturing requires breathing space, European technology ultimately benefits domestic capability development. Manufacturers like BMW and Mercedes-Benz, which currently import premium EVs at prohibitive cost, gain eventual access whilst Indian producers establish scale.

Great Wall Motor eyes 300,000-unit European plant by 2029

Manufacturing footprint decisions transcend tariff arithmetic

European manufacturers have notably accelerated local production commitments even as tariff relief materialised. Mercedes-Benz's decision to assemble the Maybach GLS in India, making it the sole market outside the United States for local production of this premium vehicle, reflects recognition that manufacturing presence signals market commitment beyond opportunistic imports. The locally assembled version commands ₹2.75 crore ($316,000) against ₹3.37 crore ($387,000) for the imported variant, demonstrating price competitiveness that transcends tariff considerations.

Volkswagen's rollout of the locally assembled Tayron R-Line just twelve months after global launch, and Renault's assumption of full Chennai facility ownership from Nissan, indicate manufacturers view India as integral to production networks rather than peripheral export markets. Jaguar Land Rover continues expanding its locally assembled range, with Defender production following successful Range Rover and Range Rover Sport assembly. These investments suggest manufacturers anticipate India's luxury segment growth trajectory justifies dedicated capacity regardless of import duty levels.

Vinay Piparsania, founder of Millenstrat Advisory and Research, characterises local manufacturing as demonstrating long-term commitment that builds confidence amongst customers, suppliers and dealer partners whilst aligning with government localisation objectives. BMW's CEO Hardeep Singh Brar has indicated that whilst completely built units currently represent roughly 5% of sales, reduced duties could expand portfolio breadth before manufacturing commitments for volume models.

Supply chain diversification accelerates amid geopolitical realignment

The agreement's timing reflects broader supply chain reconfiguration as manufacturers seek alternatives to concentrated Chinese production. European Commission President Ursula von der Leyen explicitly framed the accord as demonstrating that rules-based cooperation delivers tangible outcomes, a pointed reference to escalating trade tensions with both the United States and China. The deal follows similar EU agreements with Indonesia, Mexico, Switzerland and Mercosur, establishing a pattern of market diversification.

For automotive manufacturing, India offers labour costs 15% to 20% below Chinese levels whilst providing English-language capability and established rule of law. Japanese manufacturers have already positioned India as an export base, with Suzuki investing ¥1.2 trillion ($7.7 billion) to raise capacity from 2.5 million to 4 million units annually by 2031, explicitly identifying India as its global EV production hub. Honda similarly designated India as a manufacturing centre for an upcoming EV destined for Japanese and Asian markets.

The EU agreement provides European manufacturers with comparable positioning. With India's market projected to reach 6 million units annually by 2030, representing nearly 40% growth from current levels, manufacturers face decisions about where to place capacity serving both Indian domestic demand and export opportunities. The Commission's projection that EU exports to India will double by 2032 assumes substantial manufacturing activity, not merely finished vehicle shipments.

Small EVs offer big production and industrial advantages

Market access complexity requires manufacturing sophistication

The agreement establishes preferential access contingent upon meeting rules of origin requirements that mandate substantial processing within either jurisdiction. This creates incentives for integrated manufacturing rather than simple assembly operations. Components must undergo significant transformation to qualify for duty benefits, pushing manufacturers toward genuine production networks rather than screwdriver operations.

India's existing production incentive schemes compound these incentives. The Production-Linked Incentive programme offers support for manufacturers meeting domestic value addition thresholds, whilst the Automotive Mission Plan 2047 aims to position India's sector as globally competitive. European manufacturers accessing both trade agreement benefits and domestic incentives must structure operations to satisfy potentially competing requirements, favouring sophisticated manufacturing over minimal local presence.

Thilo Brodtmann, executive director of Germany's VDMA mechanical engineering association, described the agreement as delivering much-needed competitive advantage in one of the world's fastest-growing strategic markets. The emphasis on competitiveness rather than mere market access acknowledges that India's automotive sector has matured considerably since previous trade negotiations collapsed in 2013 over automotive disagreements. Domestic manufacturers now possess scale and capability that require European producers to compete on technology and quality rather than rely solely on preferential access.

Reciprocal access creates manufacturing export opportunities

The agreement's reciprocal provisions warrant equal attention to import implications. Indian manufacturers gain duty-free access to EU markets for 625,000 vehicles, substantially exceeding the European quota into India. For manufacturers like Mahindra & Mahindra, developing premium models on its INGLO and NUIQ platforms, or Maruti Suzuki, already exporting its e-Vitara electric SUV to European markets, this represents genuine export opportunity.

Between April and October, India exported 514,622 vehicles, approaching 67% of the previous full financial year's total. South Africa currently absorbs 17% of shipments, followed by Saudi Arabia at 16.5%, Mexico at 13%, Japan at 11% and the UAE at 7%. Europe represents a comparatively underdeveloped destination despite India's established component export relationships. The agreement potentially repositions European markets as destinations for Indian-manufactured vehicles competing against Chinese producers, whose market share in Europe is projected to double to 10% by 2030.

This creates complex manufacturing dynamics where European brands may produce in India for European sale, competing against Indian manufacturers exporting to the same markets. Suzuki's strategy of positioning India as its global EV hub explicitly anticipates serving European demand from Indian production. European manufacturers must determine whether to counter through dedicated European production or embrace Indian manufacturing for certain segments, fundamentally altering traditional production geography.

Care about these topics? - Register now for the livestream:

Digitalisation - Smarter automation

This livestream will provide a reality check on smart factory tech - what’s truly delivering on the shopfloor and where automation is finally paying off.

Implementation timeline permits strategic positioning

The agreement faces legal vetting expected to require five to six months before formal signing, with Indian Commerce and Industry Minister Piyush Goyal projecting implementation by year's end. This interval provides manufacturers with planning opportunities before duty structures change. Companies can finalise investment commitments, establish supplier relationships and structure operations to maximise both immediate tariff benefits and longer-term manufacturing advantages.

Review clauses permit quota reassessment reflecting India's booming market and any concessions to future trading partners, notably the United States. These reviews link to steel, a key Indian priority, giving both sides leverage in subsequent negotiations. Manufacturers must therefore plan for potential quota evolution rather than assume static arrangements, favouring flexible manufacturing strategies over rigid import-dependent models.

Market analysts at Nomura and BNP Paribas characterise the agreement as incrementally positive for Indian automotive manufacturers, with minimal disruption risk to existing players. Most European OEMs already operate Indian assembly plants relying on localised completely knocked down routes rather than high-volume imports. Tariff reductions may aid margin protection or offset currency pressures but are unlikely to fundamentally alter market structure in segments where Indian and Japanese manufacturers dominate.

Manufacturing implications extend beyond immediate tariff relief

The EU-India agreement's significance for automotive manufacturing transcends its headline tariff reductions. Component duty elimination, sophisticated quota mechanisms, reciprocal market access and supply chain diversification incentives collectively reshape production geography in ways that pure import liberalisation would not achieve. Manufacturers must evaluate not merely whether to sell in India, but where to manufacture for Indian, European and potentially global markets.

The agreement rewards integrated manufacturing strategies over opportunistic imports. Zero component duties favour complex supply relationships. Quota limits encourage domestic production for volume. Reciprocal access creates export platforms. Rules of origin demand genuine processing. Together, these elements push manufacturers toward sophisticated Indian operations that serve multiple markets rather than simple import channels.

European manufacturers' recent local production accelerations suggest industry recognition that India represents a manufacturing destination warranting substantial commitment rather than a peripheral market accessible through occasional imports. As Michael Field, chief equity strategist at Morningstar, observed, the agreement provides European manufacturers a fighting chance in a market heavily dominated by domestic players. That chance, however, increasingly depends upon manufacturing presence rather than import access alone.

For automotive manufacturing professionals evaluating production footprint decisions, the EU-India agreement offers clarity on one dimension whilst introducing complexity on others. Tariff trajectories are defined. Component economics are transformed. Yet fundamental questions about optimal manufacturing location, supply chain configuration and market entry strategy remain matters of judgement rather than simple arithmetic. The agreement provides tools. Manufacturers must determine how to employ them.