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Tesla is staking its future on China

CNBC logo CNBC 2/12/2019 Lora Kolodny

Tesla needs China, the world's largest auto market, in order to succeed. Customer demand and government support for so-called "new energy vehicles" there is skyrocketing.

CEO Elon Musk recently warned that without manufacturing in China, Tesla won't be able to produce 10,000 Model 3 electric sedans per week (as the company has aimed to do for years) and won't be able to offer the eagerly awaited base model at a price of $35,000.

"Bottom line is we need the Shanghai factory to achieve that," Musk said on the company's 2018 fourth-quarter earnings call.

However, Tesla — like other U.S. automakers — faces considerable competition in China.

According to Michael Dunne, founder of automotive advisory firm ZoZoGo, "China produced half of global electric vehicles last year. The U.S. produced about twenty percent. China is clearly way out in front in terms of size, production and scale."

Electric vehicle makers that are already up and running there include:

  • NIO, which went public in September 2018
  • Warren Buffet-backed BYD
  • A partner of Volkswagen and GM called SAIC Motor
  • Geely Automotive Group which is the parent company of Volvo
  • BAIC Group, and its subsidiary, Beijing Electric Vehicle Co.

A bevy of electric vehicle startups are on the rise in China too, including Byton and WM Motor Tech.

Chinese automakers have benefited from some $60 billion worth of subsidies and incentives since 2012, designed to make new energy vehicles affordable for Chinese drivers, according to ZoZoGo.

But as Musk recently bemoaned, Tesla hasn't been able to cash in on those subsidies and tax incentives. As a result, a Model S that would cost around $80,000 in the U.S. today would cost around $140,000 in China after taxes, for example.

Tesla's vehicles will probably remain very costly in China until the company begins manufacturing at its planned factory there in Shanghai.

Even though Tesla broke ground on its Gigafactory 3 in Shanghai, the company has yet to publish an 8-K filing with the SEC showing that it has secured funding, or secured a material partnership, to build it out.

Meanwhile, non-Chinese automakers, including BMW, Mercedes, Audi and Toyota, have already established a beachhead in Asia, with manufacturing and sales there conducted through a variety of partnerships and agreements with local entities.

Auto industry market strategist Rebecca Lindland noted that Tesla does have one big advantage in China:

"The Chinese government has helped Tesla tremendously by giving them a special dispensation so that they can be an independent foreign auto manufacturer in China without needing a local partner." But she also cautioned: "Tesla still has to sell these products at a profit. They still have to get the consumer to fork over a huge amount of money."

Beyond that, Tesla and its iconoclastic CEO Elon Musk still have designer appeal in China. Lindland said, "Elon Musk is the face of Tesla you know. People want to get behind him and support his mission to change the face of mobility. Why he's doing this is very clear in people's minds. People can gravitate towards that."

Doug Betts, senior vice president of global automotive at JD Power added, "I think their biggest risk will be, to a certain extent, companies like Nio that have a lot of cash and have invested a lot in the design of their cars....One thing about a local company is they know the culture, you know when their voice recognition listens to you and talks back it's going to be crystal clear Mandarin. Tesla may have some difficulties adapting to those kind of things."

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