Auto Industry

The host with the most

China welcomes Tesla founder as the clock starts ticking on local production

Elon-Musk-w

Li to Musk: you can even have a Chinese green card, if you want

Two months, two executives and two very different business trips.

In the first trip in December, Huawei’s chief financial officer Meng Wanzhou touched down in Canada. To her chagrin, the daughter of Huawei’s founder Ren Zhengfei was then arrested on extradition charges in relation to violating American sanctions on Iran.

As we pointed out in WiC435, initial efforts from Washington to frame this as unrelated to the trade war were torpedoed by President Trump who declared that her case could be “part of the negotiations” if it helped him ink the “largest trade deal ever made”.

The admission soon cast Meng as a pawn in the trade war, and for many in China it transformed her into a political hostage. American business executives started worrying about retribution if they travelled to China themselves, too.

Yet a month later the Chinese rolled out the red carpet for Tesla’s boss Elon Musk when he arrived to launch his first factory on Chinese soil. Musk was invited to meet Premier Li Keqiang last week at the Hall of Purple Light in Beijing’s Zhongnanhai leadership compound, an honour normally accorded to foreign guests on good terms with Beijing.

When Musk met with Chinese Vice President Wang Qishan in July last year, two Tesla cars were found parking outside the Hall of Purple Light. This time Musk was again allowed to drive straight into the heart of Zhongnanhai. He has found himself on the receiving end of some pretty persistent praise too. “Your thinkings are similar to Apple founder, Steve Jobs,” Li told him, before adding that he considered both company’s products to be inspired by oriental and Chinese Zen culture. “We could offer you a Chinese green card,” Li also said playfully after Musk said he “really loves China” and is willing to visit China more often.

Why was China being so solicitous? On the surface, there was a major investment to celebrate. Tesla has committed Rmb50 billion ($7.3 billion) to its Shanghai factory, one of China’s largest-ever foreign investments, which will create jobs across the supply chain.

But these new jobs could be offset by losses – and redundancies – at some of the Chinese-owned electric vehicle (EV) companies that Tesla will now be free to compete with on a more equal footing.

Tesla’s locally made cars will no longer be subject to import duties and the profits will flow straight back to the American owner, with Tesla the first foreign car brand allowed to build a factory in China without a local joint venture partner. Indeed, Tesla is only establishing the factory now, five years after announcing plans for one, because the government started to scrap JV requirements across the industry last year.

One explanation for the welcome comes from Cui Dongshu, secretary general of the China Passenger Car Association. He told Xinhua that Tesla will have a “catfish effect” on local players, pushing them to accelerate technical upgrades.

Tesla’s visit also helps in improving the optics in the trade war. Musk is a high-profile tycoon with strong skills in self-promotion. What better way to signal China’s statesmanship and its commitment to globalisation than by greeting him warmly? Premier Li stuck to that script when he said that he hoped Tesla could be a “participant in China’s further advancing its reform and opening up as well as promote stability in Chinese-US relations”.

The Tesla boss is not only welcomed by Chinese officials. His arrival cheered up some internet users this month. “I love Elon Musk,” commented one netizen. “I’d much rather have a Tesla than a local brand,” wrote another, who added that, “Tesla isn’t just a car, it’s a symbol.”

Ironically, Musk and his firm have not been so warmly regarded in their home country of late. Both had a torrid time during 2018. Concerns about cash reserves and delays in ramping up production of the Model 3 were exacerbated by Musk’s erratic behaviour. This culminated in a tweet about taking his company private, which provoked a dispute with the US Securities and Exchange Commission.

And 2019 has not got off to a great start either. Tesla’s share price fell almost 10% during the first two trading days after investors digested news that the company was cutting prices to boost sales amid the halving of a federal tax credit.

Teslarati, a news website dedicated to the firm, highlighted the contrasting attitudes in China and the US. “If the reception he received during Gigafactory 3’s groundbreaking is any indication, it appears that he is well supported in China,” it noted. “It remains to be seen if this same reception would be extended in the country Musk currently calls his home.”

What no one disagrees about is how important China is to Tesla’s growth. The country accounted for 31% of global electric vehicles sales during 2018 and is forecast to hit annual sales of seven million cars by 2025. Musk says that Tesla plans to begin producing cars locally by the end of the year, ramping up to mass production in 2020. Initial capacity will be 250,000 cars per annum, moving up to 500,000.

Analysts wonder whether this might threaten emerging local players like NIO and BAIC BJEV, which listed in New York and Shanghai respectively last September. When Tesla begins importing Model 3 cars into China this March, the sticker price will be Rmb499,000, compared to Rmb380,500 for NIO’s ES8 brand and Rmb283,000 for its ES6. But localising the supply chain should allow Tesla to drop prices lower. Some commentators are talking about just Rmb100,000 a vehicle. That seems ambitious, but it would also make the cars a lot cheaper to buy in China than anywhere else.

With all the comparisons to Steve Jobs, Elon Musk might also give a moment’s thought to how the future of the electric vehicle market could replicate trends in smartphones, where Apple’s early design and prestige advantages have been steadily eroded by local competitors like Huawei.

Tesla’s cars – in their higher end market positioning – bear a resemblance to iPhones which have traditionally targeted a more premium demographic. But as Apple is discovering, things can change fast in the Chinese market and the local players aren’t just going to sit back. They’ll evolve. And that suggests that – despite the warm welcome this month – Tesla could find the going tough.


© ChinTell Ltd. All rights reserved.

Exclusively 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.