Talking Point

Tesla’s Chinese journey

Musk’s battery partnership with CATL signals his long term vision for China

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Tesla CEO Elon Musk speaks onstage during a delivery event for Tesla China-made Model 3 cars in Shanghai

When Donald Trump was fanning Washington’s trade war with Beijing in 2018 and beseeching American manufacturers to bring their operations back onto home soil, Elon Musk was heading in the opposite direction.

On July 12 that year, Musk parked one of his Tesla cars outside the offices of Chinese vice president Wang Qishan, the country’s former anti-graft tsar. The duo then discussed “history, philosophy and luck”, Musk wrote on his Twitter account at the time.

A month later Musk stunned investors by tweeting that he had “funding secured” to take Tesla private at $420 a share. The infamous message led to a $40 million fine from US regulators. Musk then got himself into more trouble by puffing weed during a televised interview and Tesla’s share price plunged to new lows beneath $180 in May last year.

But fortunately, Tesla was soon to reach highs of its own. It set up its Shanghai Gigafactory in record time and this helped its shares to surge to a record high of $917.42 last month. That made Tesla more valuable than the market capitalisations of all China’s listed carmakers combined.

As investors speculate on whether Tesla is the best way to bet on a future ‘after oil’, the carmaker is ever more determined to drive deeper into the world’s largest automobile market – even if it means straining its relationship with one of its most important strategic partners: the Japanese giant Panasonic.

What is Tesla’s latest move in China?

During an earnings call at the end of January, Musk told investors that his firm had selected China’s Contemporary Amperex Technology (CATL) and South Korea’s LG Chem as new battery suppliers in an effort to diversify its sourcing chain.

The Tesla CEO’s remarks raised eyebrows, given its longstanding relationship with Panasonic. The Japanese giant first invested $30 million in Tesla in 2010 and the two started a major partnership through Tesla’s Gigafactory plant in Nevada four years later.

After displacing Panasonic as the world’s biggest EV (electric vehicle) battery maker in 2017 (see WiC456), CATL has been courting the world’s most iconic EV brand for a while, offering cheaper batteries to power the Model 3 sedans made in Tesla’s Shanghai factory.

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The Shenzhen-listed company then announced in early February that it had signed a two-year supply deal with Tesla running to June 2022. According to a stock exchange filing, the pact allows Tesla to set purchase volumes based on its battery needs at the time. However, Caixin Weekly has reported the preliminary agreement stated that CATL might end up supplying batteries for no less than 40% of the Tesla cars coming out of the factory in Shanghai.

CATL has now embedded itself into the supply chain of nearly every major EV maker worldwide, the magazine noted.

Tesla retains all three of the leading EV battery makers in its own supply chain, of course. By doing this there could be “even more vigorous negotiations” ahead for CATL, 21CN Business Herald reckons, as Tesla looks for a better deal from LG Chemical and Panasonic too.

“Tesla is clearly not in a hurry to cooperate with CATL, even if it has been ramping up local production in China,” 21CN wrote. “Tesla is only leaving some room open on the basis of its continuing partnership with Panasonic.”

How is Tesla’s relationship with Panasonic?

Panasonic has a longstanding bet on Tesla becoming a world leader in EVs and boosting its own prospects in automotive electronics. But while the premise still seems sound, the Wall Street Journal said the partnership has exposed “a cultural clash between the conservative, century-old Japanese conglomerate accustomed to consensus and the 16 year-old Silicon Valley upstart built around Musk’s vision for upending 100 years of automotive tradition”.

Bosses from the two firms have been pointing fingers at each other over the design of the battery production process. At the core of their differences is how best to cut the costs of making the batteries – which is key to bringing down the overall costs of the cars, and scaling up sales of lower-priced EVs.

The rift seems to have deepened as Tesla pushes for a bigger share of the China market. At a strategy briefing in November last year, Panasonic CEO Tsuga Kazuhiro said the company didn’t have a blueprint for working more closely with Tesla on the ground in China. “We don’t have any plans at the moment to set up a production site in China for Tesla’s Chinese business,” he told reporters. “It is up to Tesla to decide whether it would use Chinese-made batteries from other manufacturers or get batteries from our Gigafactory 1 [in Nevada].”

There is also trouble at Gigafactory 2, a plant in New York that Tesla inherited through its acquisition of solar panel maker SolarCity two years ago.

Panasonic first invested in the solar operation in 2016 but the Nikkei Asian Review reported last month that the Japanese firm would be scrapping the partnership for producing solar cells at the facility, which has struggled to scale up output.

Tesla’s Gigafactory 3 has been getting much more complimentary reviews since opening in Shanghai last year and Musk has also been talking up the prospects of China as a key market for Tesla’s solar panel and energy storage businesses (see WiC485).

How is Tesla positioned on technology standards?

We first reported in 2014 how the EV battle could develop into a confrontation over charging standards (see WiC246).

The China Electricity Council (CEC) has since signed an agreement with Japan’s CHAdeMo Association to develop a common fast-charging standard that is scheduled to be released this year. Yet the industry landscape is unpredictable, with a variety of alternative proposals on how the electric cars of the future will be powered up.

For instance, given how quickly O2O services have grown in China, some analysts have been proposing a scenario where Chinese motorbike riders deliver fully charged batteries to EVs that ran out of power mid-journey on Chinese roads.

That would lessen the demand for public charging places, be it a Tesla Supercharger or Japan’s CHAdeMo.

The winners in the sector will be the producers that make sales in the greatest volumes, giving them more of a say on how the batteries are going to be recharged. Local relationships will also be important – hence analysts were on full alert on February 18 after a Reuters scoop claiming that Tesla was in talks to buy batteries from CATL that contain no cobalt, one of the most expensive metals in EV batteries.

Reuters added that the adoption of the CATL batteries would mark a major switch for Tesla to lithium iron phosphate (LFP) design, away from the NCM and NCA formats (both of which contain cobalt) that have so far been supplied by Panasonic.

Tesla added another twist a few days later by saying on its WeChat account that “cobalt-free doesn’t necessarily mean LFP” so commentators are awaiting Tesla’s next ‘Battery Day’ update, which is scheduled for April, with much anticipation.

Most of the Chinese media outlets have looked at things differently, however, seeing the buzz around cobalt-free batteries as more of a marketing concept invented by Tesla to camouflage its efforts to cut its costs further in China.

The view is that changes in approach to battery production are one of the main ways that Musk’s firm can cut costs for the Shanghai-made Model 3 and ramp up sales in the Chinese market.

By switching to an LFP battery made locally in China, Tesla could cut production costs by a “double-digit percent”, Reuters also speculated.

“If the biggest EV maker and the biggest battery maker in the world both switch from NCM to LFP, the entire supply chain will change course,” an unnamed insider added on 36Kr.com.

How about Tesla’s own competitors?

BYD, a Chinese battery-maker that morphed into a car firm (backed by Warren Buffett and South Korean giant Samsung; see WiC334), is one of China’s closer equivalents to Tesla.

Similar to Tesla’s business model, BYD has branched out into solar panels and energy storage. Both firms are working on grand ambitions to accelerate the world’s transition into sustainable energy, not only through EVs but also through the generation and storage of clean energy (charging up a car from solar panels on your home, for instance, as well as capturing surplus solar power and reselling it to the electricity grid).

BYD is hardly a global brand on a par with Tesla although it boasts its own battery production unit and its chairman Wang Chuanfu has been keen to set standards for batteries too (according to Forbes magazine, he once drank a glass of battery fluid in front of Berkshire Hathaway executives in a bid to impress them; see WiC25).

In January this year Wang said BYD would start mass-producing what he termed as “blade batteries”. Again cobalt-free, these units are 50% smaller than their LFP counterparts, he claimed, and nearly twice as long-lasting.

CATL also announced late last month that it is planning to raise Rmb20 billion ($2.85 billion) via a share sale. Commentators were soon claiming that the nine year-old unicorn is raising funds to boost production capacity to meet increased demand from Tesla. Fully invested, the funds could quadruple CATL’s current output.

CATL is also gearing up to supply more batteries to JVs it has with state-owned carmakers such as SAIC Motor and GAC Motor.

In a similar move Panasonic announced last month that it was forming a joint venture of its own with Toyota, taking a 51% stake in a new battery firm.

Is Tesla’s market value going to be driven by its China sales?

Earlier this year when Tesla’s share price was pushing towards $1,000, China’s financial bloggers were boasting that their home market had lent a “big helping hand” to Musk. The claim is not entirely groundless. Tesla is the sole owner of its Gigafactory 3 car plant in Shanghai – the first time that this has been allowed in China. Previously all the global car brands had to operate within joint ventures with local partners. What’s more, the American carmaker paid just Rmb973 million for the plot of land on which its factory stands. That price, CBN says, was less than half the average amount paid for similar industrial sites in Shanghai.

Beijing News says that Tesla has also enjoyed similarly juicy policy incentives, if not better ones, than many of those on offer to local carmakers. It received Rmb11.3 billion in low-interest loans from the state banks earlier this year and subsidies from the government helped it to cut the retail price for locally-made Model 3s to below Rmb300,000. Prices could drop further to Rmb250,000 should Tesla switch to LFP batteries, the Beijing News speculated.

Tesla’s broader prospects will be shaped by how quickly the world shuns traditional cars in favour of new energy vehicles. That kind of calculation is complicated by sudden changes in oil prices and Tesla’s share price dropped back to below $600 after the collapse in the price of crude earlier this week (see this week’s “Energy and Resources” section).

In China itself, Tesla is benefiting from its status as a trendy pacesetter, even though analysts are now warning that the chaos of the coronavirus outbreak will prevent it reaching its target of 100,000 sales to Chinese customers this year.

Sales had already dropped steeply at the turn of the year because of the virus but Tesla did a little better in February, despite car sales in general dropping about 80%. It delivered 3,958 cars to new owners over the month, according to China Passenger Car Association. That was 400 more than in January and “a pretty good performance,” its secretary general acknowledged. Tesla accounted for about 30% of all electric vehicle sales in China in the period, he also noted.


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