Elon Musk may be able to send electric cars into the asteroid belt atop gigantic rockets, but he doesn’t seem to be able to solve the conundrum of Chinese government policy. The market for electric cars is growing faster in China than in any other country on earth with more than 7 million EVs expected to be sold there each year by 2025. Tesla desperately wants a piece of that pie but its cars are currently more expensive than domestic models because they are subject to a 25% surcharge the government imposes on imported cars.
China has long had a policy that requires foreign companies to work with a local partner if they wish to set up manufacturing facilities within the country. Such a partnership requires the foreign company to share all its intellectual property with the local partner. Tesla thought by building in the Shanghai Free Trade Zone it could avoid that requirement.
Tesla’s last official pronouncement on the subject of manufacturing in China occurred last June when the company released this statement: “Tesla is working with the Shanghai Municipal Government to explore the possibility of establishing a manufacturing facility in the region to serve the Chinese market. As we’ve said before, we expect to more clearly define our plans for production in China by the end of the year. Tesla is deeply committed to the Chinese market, and we continue to evaluate potential manufacturing sites around the globe to serve the local markets. While we expect most of our production to remain in the US, we do need to establish local factories to ensure affordability for the markets they serve.”
Bloomberg notes that not one word about China was mentioned at the Q4 earnings call last week. It says sources tell it that Tesla and Shanghai are having a protracted disagreement about whether a factory in the Shanghai Free Trade Zone requires a local partner or not. If Tesla needs to buddy up with a Chinese company and still has to pay the 25% import duty, it may reconsider whether it wants a manufacturing facility in China at all.
Virtually every other major car company has willingly formed a partnership with a Chinese company in order to gain access to what has become the largest new car market in the world and one that is still growing. Tesla sold fewer than 15,000 cars in China last year, placing it 10th among electric car manufacturers. (That said, only 4% of electric car sales in China come from foreign brands, and half of those are Tesla sales.)
“Tesla has no strategic path,” Yale Zhang, managing director of the Shanghai-based consulting company Automotive Foresight tells Bloomberg. “It has the halo of Elon Musk, and its products are slightly ahead of the competitors, but the others — especially the Chinese EV startups — are catching up rapidly.”
For the moment, Tesla is caught between a rock and a hard place. It wants to sell cars in China, but the import duty makes its products uncompetitive. It is reluctant to share its intellectual property with a foreign partner in a country where intellectual property enjoys far fewer protections than it does in other industrialized countries, especially the US. Neither Tesla nor the Shanghai government responded to requests for further information about the ongoing negotiations.
Last November, during the Q3 earnings call, Elon Musk told his audience that he expects Tesla to be building cars in China in about 3 years, but he advised against hard estimates or predictions there. “Don’t set your watch by this,” he said. Now the question is whether Tesla has any available pathway forward into the Chinese market other than to continue making cars in Fremont and shipping them across the Pacific to ports in China.
Donald Trump has few redeeming qualities, but he is right that China places onerous burdens on foreign corporations wishing to do business there — burdens that Chinese companies who want to do business in the US do not have to shoulder. That discrepancy between the two nations needs to be resolved.
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