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What Will Tesla Bring To The Chinese Market? – OpEd

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By He Jun*

In Christmas of 2019, Tesla’s head honcho Elon Musk received two big presents. The first being an ultra-low interest loan of RMB 10 billion Chinese extended to Tesla from a China state owned bank; the second being Tesla stocks had reached a new historical high, with its market value reaching US$ 75 billion. Insiders of the industry have said that the second gift reaped its benefit off the first one, and that Tesla can now use the term “Made in China”.

The act of Tesla investing into China is a major turning point for the company. Despite the company being a “trendy representative” of all EV (Electric Vehicle) companies globally, many factors have caused Wall Street to dump Tesla shares, and even stirred a wave of short sellers on Tesla’s investment structure. Amongst these key factors are Tesla’s long-term unprofitability, its incapability of matching production with demand in the United States and Musk’s rebellious and subversive relationship with Wall Street. 

Amidst the crisis that the company is facing, Tesla has decided to make its move by investing in China. This decision has largely paid off and pulled Tesla out of danger, at least for a while. It got the green light to set up shops in China, mostly due to the “Regulations on the Management of Investment in the Automotive Industry” that was initially proposed by the National Development and Reform Commission (NDRC) and formally implemented on January 10th 2019. With the implementation of certain new regulations, foreign companies in the new-energy automotive industry could establish their factories in China.  On the very same day that the regulations were in place, Tesla completed its filling and made a core step in the qualification of its vehicle manufacturing business. In the second half of 2019, Tesla vehicles were included in the “New Energy Vehicle Model Exempted from Vehicle Purchase Tax” list. As a result of being placed on this list, Tesla buyers enjoyed tax reliefs and subsidies meant for purchasers of new energy vehicles. In terms of the land it acquired for its factory in Shanghai, Tesla only paid half of the market price at RMB 1,125 per square meter for the factory plot. 

Where finance is concerned, Tesla received an unsecured RMB 3.5 billion loan from a banking consortium with a 90% interest rate of the central bank’s annual benchmark rate in March 2019. During December 2019, it received another 5-year loan with a cumulative total of RMB 10 billion from a few banks including the China Construction Bank, Agricultural Bank of China, ICBC and Shanghai Pudong Development Bank, again with an interest rate being 90% of the central bank’s annual benchmark – 3.915% specifically, the guaranteed “lowest interest rate of high quality state-owned enterprises”. In addition to this, Tesla has made history by becoming the first foreign car factory approved to operate 100% whilst still retaining full ownership in China. On Tesla’s end, there is no need for them to partner with Chinese companies, which helps it avoid amortization of their profits. Given that China has also recently amended its Foreign Investment Law, Tesla also no longer needed to worry about “forced transfers” of technology that it had patented. This arrangement is something that auto-makers such as Mercedes-Benz, BMW, Ford, Toyota and other international carmakers have been requesting for years, yet nobody would have expected that “latecomer” Tesla would be the first to get it. 

With the green-light, the building of Tesla’s factory in China was smooth sailing. Following the agreement signed on October 2018, work began two months later and was completed by September 2019. It formally entered production on September 2019 and commissioning a month later on October 15th. The first Model 3 produced in the new factory was rolled out on January 7th 2020, and Tesla only spent a year going from inception to production. Undoubtedly, this was all made possible with China’s influence and support and may be the fastest investment and factory-building process amongst all automotive industry in the world. Therefore, it did not come as a surprise that when the first Model 3 was launched straight out of the new Shanghai production facility, Musk first words were “Thank the Chinese Government!”

Why did the Chinese government fully support Tesla’s entry into the Chinese market? What can Tesla possibly bring to China, and what are the hopes of the Chinese government and the Chinese EV industry for Tesla? ANBOUND’s researchers believe that Tesla’s “uncanny good luck” must be viewed from a mix of perspectives.

Firstly, Tesla stumbled upon a right time, with an “opportunity” being presented by the U.S.-China Trade War. A trade war in any shape or form is never good for trade and investment. In fact, the current trade war has softened the trade and investment activity of both countries. Tesla however, has found its lifeline where the U.S. has failed it. Under pressure from the U.S., China is trying to open up to the world. A good example of its efforts would be to pull in an influential foreign company, preferably a U.S. funded one, in order to boost its image of successfully opening up and showing that the market has responded to China’s proactiveness. Tesla’s move this time around was a boost to China’s efforts – bringing up the potentials of the Chinese market and stimulating the interest of the global capital market for some time to come.

Apart from that, what else did Tesla bring to the Chinese market? Looking at the market, it can be said that there are pros and cons. The good thing was that it brought an EV to the Chinese market that seemed like its design is at the car of the vehicle’s ideation process and not purely an afterthought. Also, by producing directly within China’s borders and selling it immediately to the Chinese market, Tesla has given Chinese consumers a new option when it comes to purchasing new-energy vehicles and not be forced to purchase locally produced EVs which are not up to par in terms of quality. For Chinese EV manufacturers and parties investing into these factories however, Tesla’s entry to the market may bring more harm than good. The question is with Tesla in the Chinese market, how is one supposed to profit? If Tesla’s reduction of prices can reach a much larger scale, many competing local brands of EV may be forced to shut down as a result. For suppliers participating in the supply chain of EVs, it would only be beneficial for them only if they can enter Tesla’s supply chain. Otherwise, it is nothing but bad news for them. 

Plus, the Chinese government’s investment in Tesla has provided it with many conveniences along with market space. However, since the Chinese government is not able to force a technology transfer from Tesla, then the question of what does it aim to achieve with its investment comes to mind. According to Tesla, its localization rates of the domestic production is at 30%, and it aims to reach 70% by mid-2020 and 100% by the end of the year. It can be reasonably suggested that the Chinese government hopes that Tesla will become an industry “leader” that can represent its refreshed industry standards and promote the localization of EV design and manufacturing in China’s industrial and supply chain, ultimately driving China’s EV industry to new heights. Previously, China has relied on an “iPhone” model in the smartphone industry. Foxconn has manufactured iPhones for Apple in its Chinese factories since 2007, acting as a catalyst for China’s midstream and downstream industry chain. Companies that benefited from this were battery producer BYD Co Ltd, chipmaker MediaTek, lens maker Shunyu Optical Technology, speaker manufacturer AAC and Hunan based Lens Technology Co Ltd. Ultimately, this arrangement led to the rise of China-made smartphones. It is obvious that China hopes to emulate this “iPhone model” in its investment in Tesla, bringing up the local EV industry and realize a “market-to-technology production” path.

Final analysis conclusion:

The grand scheme of Tesla to invest in China has just begun, and whether China will be able to reap its returns from its Tesla investment remains to be seen. From the perspective of the country, if Chinese car manufacturers can move beyond the amount of state subsidies they would receive, and how large their investments can potentially be from venture capital, instead focusing on improving their learning capabilities, improving the design as well as manufacturing process of their EV (Electric Vehicles) and learning from Tesla, then China’s big gamble on Tesla would have paid off.

*He Jun is a master in the Institute for the History of Natural Sciences, Chinese Academy of Sciences, majoring in intellectual history of science and is a senior researcher at Anbound Consulting, an independent think tank with headquarters in Beijing. Established in 1993, Anbound specializes in public policy research



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Anbound

Anbound

Anbound Consulting (Anbound) is an independent Think Tank with the headquarter based in Beijing. Established in 1993, Anbound specializes in public policy research, and enjoys a professional reputation in the areas of strategic forecasting, policy solutions and risk analysis. Anbound's research findings are widely recognized and create a deep interest within public media, academics and experts who are also providing consulting service to the State Council of China.

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