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With Tesla’s China Gambit Elon Musk Is Circling the World

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Tesla Plots Bold China Factory Move

Elon Musk keeps moving west. Born in South Africa, educated in Ontario and Pennsylvania, now living in California, his next stop is China. The Tesla CEO has already sent Spacex Satellites around the world, now he’s halfway there by car, too.

Musk has chosen Shanghai as the place he intends to open his second Tesla factory.

The company is acquiring permits now. If all goes as planned—always a question with a Musk project—the factory will produce its first cars by 2020. Two or three years after that, the new China factory is slated to produce 500,000 Teslas a year.

Musk’s original Tesla gigafactory in Fremont, California, is supposed to be at that level already. So far in the first half of 2018, it’s up to 88,000 cars, and there’s no sign the pace is speeding up to come close to target.

So take the China projections with a grain of salt, this is a significant move nonetheless. With Donald Trump waging an all-fronts trade war with Canada, Mexico, China and Europe, the new Tesla plant takes on a whole new economic glow.

Tesla’s new plant will be the first one in China to be wholly owned by a foreign automaker. That comes about because of new laws in China as it tries to attract more manufacturing business.

The Chinese venture means that Tesla represents yet another US business looking to manufacture outside the US where it can escape the Trump administration’s tariffs on steel. Harley Davidson claims the tariffs on European steel imports drive the price of its motorcycles up by $2,200 when they are made in the US. Therefore, Harley’s moving jobs to Europe to make the bikes it sells in Europe.

The impact of Trump’s tariffs is even greater on the pricey Teslas. Tesla estimates they will add roughly $30,000 to a US-built Tesla Model X and $27,000 to its lower-priced Model S. That represents a 30% increase in the price of the Model S and roughly 20-25% for the Model X.

It’s a good reason to move west.

In addition, China has answered the Trump tariffs with its own levies on autos imported to the country. A Tesla factory in China, selling to China would escape US tariffs on steel and Chinese tariffs on autos in one bold move.

Tesla’s Going Where the EV Power Is

China is an obviously desirable expansion market for Tesla. The company sold nearly15,000 Teslas in China last year, which comes to about 3% of the Chinese market. But the fact that Tesla manufactures all-electric vehicles puts the company on ground zero for the global EV revolution.

China is far and away the world’s largest EV market. The country wants to produce 7 million EVs a year by 2025. Consumers are on track to buy 1 million EVs in China this year.

Most Chinese EV’s are modest economy cars. Tesla enters the luxury car end of the business with the cars that have more cachet than any other mark in the world. That’s why latecomer, small, Tesla really could thrive in the Chinese auto market.

Another big plus for Tesla and all companies in the EV business in China is that the country has been aggressively supporting the rechargeable battery industry. Battery packs are currently the largest cost in EVs.

Chinese battery makers BYD—Build Your Dreams—and Contemporary Amperex Technology has both benefited from subsidies awarded to companies in the rechargeable battery industry. Analysts believe battery prices will fall by more than half over the next five years.

The technology is clearly there, and so is the potential for a good joint venture. In the US, Tesla partnered with Panasonic to build a battery factory in Buffalo, New York. In China, new rules will allow it to do the same thing with a Chinese partner. In that past, that industry was closed to outsiders.

Analysts who watch Tesla are encouraged but wary about the China move. The issue for them is money. A Bloomberg headline recently declared, “Tesla doesn’t burn fuel, it burns cash.”

Musk did not reveal what the company expects to spend on the new factory. Whatever the price, though, Tesla will need to raise new capital.

But Tesla has made a habit of making its doubters look silly. The stock rose on the news of the China deal, which suggests shareholders won’t mind a new equity raise at all.

In the meantime, Tesla cars cost 70% more in China than they do in the US thanks to tariffs coming and going. Doing whatever it takes to bring down prices and sell into the world’s largest EV market looks like an idea worth financing.

 

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