NEW ENERGY: Tesla EV Plan Lands in Shanghai — Again

Bottom line: Tesla is likely to announce a new $9 billion electric car joint venture in Shanghai within the next two months, which could begin production as the industry starts to gain traction in the next 1-2 years.

Tesla on cusp of electric car JV

Almost a year to the day after media reported an imminent deal that would see electric car maker Tesla (Nasdaq: TSLA) set up a plant in Shanghai, new reports are emerging saying the long delayed deal will finally be announced. Anyone sensing a bit of “boy who cried wolf” with the latest reports is probably justified in feeling slightly skeptical. But I would quickly add this time perhaps we could finally see an announcement. It may not be as imminent as the reports are indicating, but perhaps within the next month or two.

Anyhow who feels compelled can go back and look at the reports a year ago, at which time I also predicted an announcement could be coming in the next month or two. (previous post) I tend to probably believe such reports a bit too much, mostly because China is a famously leaky place for such news. But that leakiness means that talks for deals often get out when they’re still in the relatively early stages, whereas in the west most such leaks don’t occur until the deal is nearly done.

The bottom line is that Tesla really wants to build a plant in China, since the country is the world’s largest car market and Beijing wants desperately to promote the electric vehicle industry. Unlike the scores of electric car makers here that spew out thousands of mediocre product using old technology that nobody wants, Tesla uses the kind of state-of-the-art technology that Beijing would like to bring into China and see dispersed throughout the industry.

With both sides wanting a deal so badly, it seems inevitable that something will be done. It’s just a question of when and where.

The answer to the first question appears to be Shanghai, based on the latest reports that are originating in a story from Bloomberg, which is usually relatively accurate. (English article) The reports say that the factory will be located in Shanghai’s Lingang development zone, and an announcement could come as soon as this week. The project would see the US car maker set up a factory with at least one local partner.

Reports back in February showed a leaked document indicating that Tesla talks — first disclosed a year earlier — were still alive, with Lingang as the leading contender in Shanghai. (English article) At that time it wasn’t clear if Lingang was the only candidate or if Tesla was talking to other cities as well. The leaked document also said the venture would be a 50-50 endeavor, with annual capacity of 500,000 cars. So the latest reports appear to show that Lingang and Shanghai are most likely to emerge as the winners in the contest to build the $9 billion plant.

Good Timing

The timing of this particular project looks relatively good for Tesla. The company’s stock now trades near an all-time high, giving Tesla a market value of $60 billion, more than General Motors’ (NYSE: GM) $52 billion. That means loss-making Tesla is technically now the largest US automaker based on market value. More importantly, that means the market is quite bullish on the company now, so it should have no problem raising the funds needed for this new plant, probably $4-$5 billion.

Tesla got off to fast start in China in 2014, when charismatic chief Elon Musk charmed local media and charged up potential buyers with a smooth ride into the market. But it didn’t take long for the company to stall, resulting in a series of management overhauls and a much lower-key approach to the market. The company hasn’t released many figures since then,  though figures it announced in 2015 didn’t sound too impressive, totaling around 3,000 cars sold in the first three quarters of the year. (previous post)

I personally have noticed quite a few more Teslas on the road these days here in Beijing, though obviously that’s not too scientific an approach. But the fact is that China has been aggressively installing charging stations and encouraging building management companies to allow installation of chargers on the premises to promote the sector. Given that a factory would probably take at least a year to 18 months to build and start producing, the market could be ripe for a nice sales boost for Tesla by the time such a facility actually came on stream.


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