NEW ENERGY: Tesla Takes Its Time With China Plant

Bottom line: Tesla’s announcement that its China plant is three years away puts a clear and realistic timeline on its intentions, which include strong growth in the market banking on supportive policies by Beijing.

Tesla gets realistic about China car production

Anyone who was hoping that electric car superstar Tesla (Nasdaq: TSLA) would start cranking out its products in China anytime soon will have to think again. Founder and celebrity CEO Elon Musk has poured cold water on all the speculation about his company imminently building a China manufacturing base by saying local production is at least 3 years off. That’s just a single data point, but it’s quite a significant one considering all the talk that’s been swirling around these days.

That talk dates back a couple of years, when reports first emerged that Tesla  was interested in such a move. One of the stumbling blocks all along has been the ownership issue, since China now limits foreign ownership of any car-making joint venture to 50 percent. But that looks set to change, which had fueled speculation that Tesla would step on the gas pedal once it got the green light, pardon all the car metaphors.

We’ll look more closely in a moment at the bigger picture in China’s new energy car market and why many were guessing that Tesla could be stepping on the accelerator to make its cars here soon. But first let’s jump to the actual news, which has Musk simply saying on Tesla’s latest earnings call that his company is about three years away from making its electric cars in the world’s largest auto market. (English article)

Musk’s remarks were obviously calculated, though he didn’t give much detail beyond the date, which would put the first output sometime in 2020. He did say the plant would make about 200,000 vehicles per year, mostly for buyers in China but also in other Asian markets. His remarks are further validation that Tesla has pretty much set its sights on building a plant in China, though of course there’s always the chance such a deal could collapse.

The big backstory here is that Tesla is one of the few relative success stories here in China among electric car makers, and that Beijing is aggressively promoting new energy cars as part of its plan to phase out traditional gas-powered cars in the not-too-distant future. At the same time, China is already the world’s largest auto market, meaning that as Beijing steps on the pedal to phase out gas-powered cars, Tesla will be in a sweet spot to take a big slice of the local market.

Lots of Talk

Reports have popped up a few times already this year on Tesla’s intentions, and the theme is largely the same. They all say that Tesla is reportedly in advanced talks for a factory in Shanghai, quite possibly its Free Trade Zone, for a venture that it would either own completely or at the very least in which it would take a comfortable controlling stake.

That takes us to the point I raised earlier, namely that current Chinese law doesn’t allow a foreign company to hold a controlling stake in local car-making joint ventures. But Beijing is reportedly set to change that because it really wants to promote the technology and knows that most foreign companies won’t want to play ball if they have to work with a controlling Chinese partner. (English article)

The other piece of the puzzle is that China is rolling out tough new rules in 2019 that will force all car makers to record roughly 10 percent of their sales as new energy vehicles each year. (English article) That’s going to be quite tough for big foreign brands that currently sell no such vehicles, and all are setting up joint ventures now with local EV makers. But those foreign brands will also be allowed to buy excess credits from pure-play EV makers like Tesla, though I believe such credits would have to come from companies that sell domestically-made vehicles.

That condition was what was leading many to speculate that Tesla would want to quickly set up a domestic production plan, which would allow it not only to sell its own cars but also profit by selling excess credits to other traditional car makers that couldn’t meet their quotas under the new system.

I’m slightly surprised at Musk’s conservative estimate, as he’s typically quite bullish and aggressive. But such an approach has gotten him into trouble in the past, most notably when he predicated big China sales in Tesla’s early days and then ended up badly missing that forecast. Accordingly, I have to commend him for coming to realize that China is a complex place where things often happen slowly, and adopting a more realistic and probably accurate view about what he can achieve in the market.

 

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