Auto Industry

Going it alone

Ownership changes could trigger big Tesla move


Ready to open a China factory?

Tesla’s boss Elon Musk has come round to the view that human workers are underrated – a consequence of his having endured multiple challenges getting his automated production line to build his company’s new Model 3 car.

It makes for an unwelcome distraction for the Tesla tycoon in a month in which Chinese leader Xi Jinping has announced plans to reduce 25% tariffs on imported cars.

Also this month the government said it would be phasing out rules requiring foreign auto manufacturers to commit to joint venture agreements where a Chinese partner holds 50%. The limits will be lifted over five years, but the changes will apply to the electric car industry from this year, principally benefiting Tesla, which has resisted setting up a local venture because it does not want to risk losing proprietary technology to a potential rival.

Tesla had previously been in discussions with the Shanghai government to set up a factory in the city’s free trade zone, but the talks stalled. Musk complained that trying to do business in China was like “competing in an Olympic race wearing lead shoes”. But in a series of tweets, he welcomed this month’s news by saying that the Chinese have taken “very important action”.

While analysts agree that the long-term future of China’s car joint ventures are in doubt, they think that it will be too costly and complicated for foreign firms to disengage from them in the short-term. Sources at General Motors told the Wall Street Journal they do not intend to unwind their 10 JVs even if restrictions are lifted, for instance.

China set up the rules to prevent its fledgling car industry from being overrun by longer-established global rivals. The policy worked, although critics of the measures say they have reduced the incentive for local manufacturers to develop their own cars, relying instead on locally-produced versions of the international brands.

The government doesn’t want to repeat the same situation with newer technologies such as electric vehicles (EV) where Chinese carmarkers, in many ways, are ahead of their rivals. China already has its own national champions that are more confident of competing with the likes of Tesla. The government’s promotion of the EV industry at large means that the Chinese market accounted for about 55% of electric cars sold globally in 2017.

Some 770,000 vehicles were sold in China, up 53% year-on-year, and the sales momentum has continued into 2018, with the BAIC-EC Series leading the pack. Foreign car manufacturers represent just 5% of Chinese EV sales, with Tesla accounting for 60% of that figure.

Naturally, Musk is keen for a lot more but Tesla will need to find at least $9 billion to build a local manufacturing plant first.­ The timing of the announcement on the joint venture rules is also difficult for Tesla’s ambitions in China – analysts predict that Musk’s firm may need to raise up to $2.5 billion in new capital this year, with a Bloomberg poll of bank researchers saying the carmaker will burn through $994 million of cash in the second half of 2018.

Tesla is a company which has never been shy about raising capital, but Musk has insisted it will not be making another cash call in 2018.

Ironically, a joint venture partner in China might have helped with any cash shortfall and another benefit is that joint ventures can help carmakers get on government subsidy lists.

However, Tesla seems likely to go it alone, despite its share price taking a pounding after difficulties ramping up production of its first mass-market car – the Model 3. It has also had to contend with a recall in China of 9,000 Model S vehicles at risk of corroded bolts on steering wheels.

The stock is down 25% from its most recent peak last September and Musk says he has taken to sleeping at the factory to make sure that the production situation improves. “We had this crazy complex network of conveyor belts,” he told CBS. “Excessive automation at Tesla was a mistake,” he also tweeted. “To be precise, my mistake.” Until Tesla has ironed out its problems at home, Musk may not have the time or the funds to give production in China more serious consideration.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.