As Tesla falls further and further behind in its quest to produce 10,000 Model 3 sedans a week by the end of next year, WSJ reported Sunday that, after months of talks with local government officials, Tesla has finally received permission to open a factory in Shanghai, one of China’s designated “free trade zones.”
If accurate, the report would signal a major shift in China’s policy toward foreign automakers. Until now, US carmakers like GM hoping to sell cars in China’s domestic market have been forced to work (and more importantly share profits and technology) with a local partner.
But more surprising than the news itself is the timing, as Tesla continues to struggle with major production delays at its Fremont Calif factory, a problem that will no doubt be exacerbated by the company’s decision to lay off hundreds of workers and replace them with cheaper contract labor in what has been characterized as a blatant attempt to suppress unionization efforts. WSJ says cars produced at the Shanghai factory would primarily supply local markets while allowing Tesla to sale cars across the region. Meanwhile, any cars shipped to the US from the Shanghai factory would face a 25% tariff.
The scoop comes from WSJ’s Tim Higgins, who has broke a handful of big Tesla stories in recent months, including a report earlier this month about workers at Tesla’s Fremont factory being forced to assemble Model 3s by hand because the factory's production line hadn't yet been completed.
“Electric-car maker Tesla Inc. has reached an agreement to set up its own manufacturing facility in Shanghai, according to people briefed on the plan, a move that could help it gain traction in China’s fast-growing EV market.
The deal with Shanghai’s government will allow the Silicon Valley auto maker to build a wholly owned factory in the city’s free-trade zone, these people said. This arrangement, the first of its kind for a foreign auto maker, could enable Tesla to slash production costs, but it would still likely incur China’s 25% import tariff.
Tesla is currently working with the Shanghai government about details of the deal’s announcement, such as timing, one of these people said. The effort comes as President Donald Trump, who has been critical of China’s trade policies, prepares to visit Beijing early next month.
A Tesla spokesman didn’t have a comment beyond reiterating the company’s previous statement in June that it planned to “clearly define” production plans in China by year’s end. The Shanghai government didn’t reply to a request for comment."
While the news isn’t exactly a surprise - Tesla has seemingly been in talks to open a factory in China for ages and has hinted that a factory might be opening soon - given the timing, one can’t help but question whether the reporting is accurate.
To this point, the Wall Street Journal has a rule - common among legacy media organizations - whereby if a company’s communications department is the source of leaked information in a story, the paper won’t report that the company refused to comment or declined to comment - because it wouldn’t be true. Tesla’s comms department was named in the story, so therefor the information either came from sources close to the Shanghai government, or some other third party (or, of course, a combination).
As WSJ points out, Tesla is still working out the details of the agreement. Presumably, breaking ground remains a long way off. Perhaps there’s still time for the deal - assuming one is in fact being negotiated - to fall through.
Of course, being allowed to operate in the country without a local partner would be an unprecedented step for China’s free-trade zones. The Chinese government wouldn’t set such a precedent without careful consideration, though it did circulate a proposal on possibly allowing foreign EV makers to circumvent the partner rule if they build their operations in the country’s free trade zones.
Until now, foreign auto makers have built cars in China through joint ventures with local manufacturers. That allows them to avoid the 25% tariff on autos, but also forces them to split profits, and potentially share technology, with the local partner—something that has tripped up Tesla’s previous efforts to expand there.
Under current rules, the cars Tesla builds in the free-trade zone would still count as imports and incur the tariff. Auto analysts in Shanghai doubt the Chinese government has any incentive to give Tesla special treatment.
“Government regulators examine every deal and try not to set a precedent,” said Bill Russo, chief executive of Automobility, a Shanghai-based consultancy, and a former Chrysler executive. “Whatever deal Tesla gets, others will want it too."
Of course, the logic of competing for a foothold in China’s domestic market - despite the myriad obstacles that remain for foreign companies, not the least of which are the PBOC’s stringent capital controls, which make it difficult for foreign corporations to repatriate profits - is unimpeachable. According to a study published by the China Association of Automobile Manufacturers this week, Chinese buyers are expected to have purchased 700,000 electric vehicles by the year’s end.
Sales have contineud to climb even as the Chinese government, which has spent billions on EV subsidies, this year pared back financial incentives for EVs by 20%. Of course, the increase is probably because the government has embraced other more coercive methods to push customers toward electric vehicles as it tries to combat a worsening air pollution problem in its cities. For example, the local government has dramatically increased the share of license plates awarded to EV owners to incentivize purchases.
Elon Musk wouldn’t be the first American to try to compete in China’s EV market. Chinese electric car company BYD, which is backed by Warren Buffett, was the best-selling electric carmaker last year and sells seven models in the country.
In August, General Motors said it would start selling the Baojun E100, a tiny electric car costing about $5,300 after national and local electric vehicle incentives, CNNMoney reported.
China’s EV market, already the world’s largest, is expected to experience rapid growth over the coming decade, as the Chinese government pushes a plan to eliminate fossil fuel-burning vehicles entirely over the coming decades. The Chinese government is targeting 7 million EV sales a year by 2025, up from 351,000 last year, and in September it ordered all auto makers already operating in China to start producing EVs by 2019. Officials have also said they are working on a plan to ban gasoline cars.
Tesla won’t report third quarter earnings until next month, but the company reported record cash burn in the second quarter (though it did have about $3 billion of cash on hand)…
...meaning it will likely need to issue more debt to finance the construction of the factory. In August, Tesla announced a $1.5 billion bond offering purportedly to ramp up production on the Model 3.
But regardless of the cost, China is an essential market for Tesla. And as Elon Musk scrambles to justify the company’s obscene valuation as its recent production difficulties have forced it to cede the mantle of most valuable domestic automaker to GM.
However, there is plenty of skepticism as to whether this is Muskian 'fake news'...