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Musk coy on Chinese plans

What does Panasonic’s battery move in China mean for Tesla?

CEO of Tesla Motors Musk waves during a news conference in Beijing

Musk: needs to get China right

Nevada politician Mark Hutchison recently returned from a business trip to China that plugged his state’s tourist attractions. But what enthused prospective tourists most wasn’t the chance of winning big at a Las Vegas casino or taking a road trip through Death Valley.

Getting more attention, it seems, was Tesla’s Gigafactory, which will extend to 13 million square feet when the final phases are completed. “Tesla was a big topic of conversation when I was over there. Chinese tourists, the travellers, all those we met love Tesla and they want to come and see the Gigafactory,” Hutchison told the Reno Gazette.

The feedback hints at the pulling power of the Tesla brand in China and that so many of its citizens seem to view its cutting edge technology as an attraction. It is harder to imagine Western tourists displaying the same degree of enthusiasm for visiting a factory on their holidays. Yet as WiC has reported, ‘peak gasoline’ is only a few years over the horizon, with electric cars set to dominate the industry by the 2030s. The most recently released figures reveal that 90,000 electric vehicles were sold around the world in March, the second best month ever. Europe accounted for 29,000 of the total, up 30% year-on-year. In the US, 18,000 electric vehicles were sold, again up 30% year-on-year. But it is China which is powering ahead, recording sales of 32,000 during March, up 89% year-on-year.

Sales ought to go up further in future, driven by the government’s adoption of a ZEV (zero emission vehicle) credit scheme modelled on one pioneered in California. Provisional details suggest car manufacturers will be required to ensure that 8% of their total vehicle sales in China are electric by 2018 and 12% by 2020. Those are aggressive targets (the current percentage is 1.4% per month) and might partly explain why Tesla CEO Elon Musk was granted a one-on-one meeting with vice premier Wang Yang when he visited China in April.

Globally, Musk’s firm sold 25,000 vehicles in the first quarter (of which, 5,000 went to China) – ranking first in the electric car industry.

Tesla is the only next-generation manufacturer with an established sales presence in Europe, Asia and North America. Few doubt just how much of a lead it would open up in the global rankings if it had unfettered access to the Chinese market, the world’s largest for new energy vehicles, with sales of 507,000 units last year. Tesla is already the only non-Chinese manufacturer with any kind of meaningful performance, raking in revenues of $1.065 billion in 2016, or just over 15% of its worldwide total. This has given it a 4.3% market share in China, with first quarter sales up 350% thanks to imports of the Model S and Model X (both cars operate at the luxury end of the market, in contrast to their local rivals).

The challenges Tesla faces in China have also been well documented. Firstly, its cars have to rely on a bespoke charging network because they are incompatible with the State Grid’s charging infrastructure (although Tesla is now selling adaptors that make charging possible). More importantly, its cars are significantly more expensive than its local rivals. In part that’s because it does not have a local joint venture partner and therefore cannot manufacture them locally. As a result, the Tesla brand is slapped with 25% import duties and 17% VAT. It gets no access to government subsidies and simply shipping a Tesla to China costs at least $3,600 per car.

For the past year or so Tesla has been playing a game of cat and mouse with the government over plans to manufacture its cars in China. Musk says Tesla does intend to do so but concrete plans haven’t materialised as it waits to see whether the authorities will drop their ban on allowing foreign car manufacturers to operate wholly-owned factories (Beijing has hinted periodically that the policy might be revamped).

Last month Tesla shot down reports in the Southern Metropolis Daily that it had struck a deal to build a gigantic factory (without a Chinese partner) in Guangdong province. The sense is that it is reluctant to set up a joint venture that might result in technology leakage. During the most recent earnings call, Musk was asked about the company’s Chinese growth plans and the chances of changes to the ownership restrictions. His reply was typically non-specific. “I don’t think it’s quite the right timing to make any announcements on that front,” he said. “But I would expect us to define our plans more clearly by the end of this year. The China rules changes are a good thing.”

Over the last month Musk has announced plans to build at least four more Gigafactories. To put that growth into perspective, the Nevada Gigafactory alone should increase annual global production of lithium ion batteries to 35 GWh by 2018 (i.e. double today’s level). And if output falls below that target, some analysts think it will be because Tesla has failed to formulate a workable China strategy. Much hinges on the new Model 3 – Tesla’s first ‘mass-market’ car, retailing for about $35,000. Tesla has held back on releasing more information about the waiting list for the Model 3, but it was reported to have attracted registrations of 373,000 in the first six weeks after the vehicle was announced. The company says that it is on schedule to begin production of the Model 3 in July, with a target of 5,000 cars a week by December and 10,000 a week by the end of 2018. Sales to Chinese customers are scheduled to begin in 2018.

While the Tesla Gigafactories are making most of the headlines, the majority of new lithium-ion battery capacity is being built in China. Some of these plants are expected to be even bigger than Tesla’s facilities. Beijing is also making it difficult for foreign producers to get a foothold in the Chinese market, with draft guidelines last year indicating that car battery makers will need to have at least 8 GWh of production capacity in China to qualify for subsidies – a target that local producers such as BYD and CATL find easier to meet.

When Tesla first proposed the Gigafactory idea three years ago, it championed potential cost reductions on battery packs of more than 30%. Indeed, the savings are part of the effort to make the Model 3 more affordable to customers. But one question is what happens if the Chinese players prove capable of making the same style of batteries even more cheaply, putting pressure on Musk’s bet on in-house production.

One of the constraints for the wider industry is battery life, although Musk says his new 2170 lithium ion battery is the densest and cheapest on the market. In the meantime Panasonic has been ramping up its existing battery business in China through a joint venture with battery distributor Jiexing New Energy in Suzhou. The plant is going to produce the cells in the existing 18650 battery format, which is now classed as trailing edge technology by Tesla. It will start production towards the end of the year but there is no mention so far of the factory being part of the production line for Tesla’s 2170 design (used for the new mass market Model 3).

Tesla is a crucial partner for Panasonic as the Japanese firm shifts away from mainstream consumer electronics to rechargeable batteries and infotainment systems. Panasonic is the exclusive supplier of batteries for Tesla’s Model S and Model X but analysts think that the gamechanger is when Model 3 sales start to feed through to its bottom line, fuelled by its $1.6 billion investment in Tesla’s Gigafactory in Nevada.

Symbolically it is also Panasonic’s centenary next year, after founder Matsushita Konosuke began selling self-designed electric sockets from his house in Osaka prefecture in 1918. Perhaps Tesla might take heed of one of his more famous maxims when it considers how best to boost sales in China. Having a superior product is no use unless you can sell it, Matsushita advised.

Meanwhile the issue of battery quality has returned to the headlines in China this month. That’s because of a mass fire involving electric buses at the Beijing Crab Island Resort. National Business Daily reports that 89 of the new energy vehicles burst into flames, with the reason why the buses seemingly spontaneously combusted still a source of speculation. The incident caused Rmb100 million ($14.49 million) of vehicle damage and is thought to be the worst blaze of its kind since China began promoting electric vehicles in 2009.

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