Tesla is experiencing significant competition in the Chinese new car market due to tariffs levied against imported cars by the Chinese government in response to tariffs imposed on Chinese exports by the Trump administration. When Tesla announced its Q3 production report last week, the company said it was able to “significantly increase” deliveries of the Model S sedan and Model X SUV “notwithstanding the headwinds we have been facing from the ongoing trade tensions between the US and China.” Update: This paragraph and the next one have been updated to remove an incorrect statement and implications regarding Tesla’s Chinese deliveries.
Tesla has raised the price of the cars it sells in China by 20% to account for the higher tariffs imposed by the government earlier this year. Chinese customers see the company’s products as being far superior to other options available to them, and so are willing to pay more to own them, but not as many customers as when the prices were lower. All cars imported from the United States are now subject to a 40% tariff, while those manufactured and imported from other countries only pay a 15% tariff.
According to the company, it costs 55–60% more to manufacture a car in the US than it does to produce the same car in China. As a result, Tesla is accelerating the construction of its new production facility, which will be known as Gigafactory 3, in the Free Trade Zone outside Shanghai. According to a report by CNBC, Tesla says it now plans to begin manufacturing at the new factory in less than 2 years time and to achieve annual production of 500,000 vehicles within 5 years.
Some people have questioned where the company will find the money to pay for the new factory, but as Kyle Field reported in August, the facility will be financed by local Chinese banks and investors. That means it will not need to look to sources of funding in the US, where it is currently experiencing fraught relations with Wall Street and the Securities & Exchange Commission (SEC).
The Trump tariffs may not have led directly to Tesla’s decision to build a new factory in China, but they are a major factor in the company’s decision to complete the factory and get production started sooner. If Chinese customers are willing to pay a premium of up to 40% for Tesla automobiles, imagine what the demand will be for cars built within China that cost significantly less?
The impression of Chinese-made goods is not particularly favorable among US consumers, but Chinese citizens strongly prefer to buy Chinese products whenever possible. When Gigafactory 3 gets rolling, Tesla should be able to sell every car it can stamp, weld, and bolt together.