The Chinese government announced today that it plans to change the rules for foreign car manufacturers that want to make vehicles in the country. It’s a major shift in the larger landscape for American, Asian, and European automakers. It’s also one that could benefit Tesla — though maybe not without burdening the company, which is already stretched thin as it tries to crank out Model 3s here in the United States.
Until now, foreign automakers were not allowed to own more than 50 percent of manufacturing efforts on Chinese soil. This forced automakers to not only share profits in what has become the largest car market on the planet, but in some cases, share expertise as well, all as part of an effort to create a rising tide for Chinese car companies. But now the Chinese government says it will lift those restrictions on makers of electric vehicles sometime later this year. It will remove them for commercial vehicles in 2020, and on conventional passenger vehicles in 2022.
Tesla has found success in China despite high import taxes
Tesla exports its cars to China, and the company accounts for around 9 percent of the booming EV market there. But those exports are subject to import taxes of 25 percent. China recently threatened to add another 25 percent on top of that during the recent escalation with President Trump (though it has since talked about potentially easing import tariffs on cars).
Most automakers have acquiesced to the joint venture rule and partnered up with Chinese manufacturers to skirt that import tax, so that they can keep costs low for customers and access the market. Some, like GM and Ford, even have multiple partnerships.
Tesla, meanwhile, has spent the last two years working to secure a manufacturing facility in Shanghai. The company tried to pressure the government to allow it to manufacture cars without partnering up with a Chinese automaker, but those efforts recently stalled. Musk was left tweeting at President Trump about China’s import taxes and the joint venture rule, where he argued that it makes things “very difficult” and comparing it to “competing in an Olympic race wearing lead shoes.”
Rolling back the restrictions could pave the way for Tesla to finally secure its own manufacturing facility in China. Going solo could help it maximize profit in the booming EV market there — one that’s only going to grow as the country phases out internal combustion engines.
“This is definitely a boon for Tesla,” Tasha Keeney, an analyst at ARK-Invest, tells The Verge. And while Tesla has been demonstrably reticent to partner with a Chinese automaker, Keeney points out that Tesla also has backing from Tencent if it wants some local support. Tesla declined to comment on the rule change.
“This is definitely a boon for Tesla.”
But Tesla is also balancing a number of spinning plates in the US right now, and so manufacturing in China isn’t something that should immediately take priority, Jeffrey Osborne, senior research analyst at Cowen, tells The Verge.
“Investors that we speak with aren’t necessarily jumping up and down,” he says. Instead, they view it more as a long-term positive — if and only if Tesla can get past its near-term problems, like ramping up production of the Model 3. “If you can’t finish the Model 3 domestically, then the long-term roadmap isn’t really there,” he says.
Keeney agrees. “Of course we want Tesla to get the production process right here before building out another factory in China,” she says.
There’s also the question of how Tesla would pay for a factory in China. Early reports in the process pegged the price at close to $9 billion, money Tesla simply doesn’t have right now. The company burned through much of its cash reserves in 2017 in order to get Model 3 production off the ground, leaving it with $3.37 billion in cash and cash equivalents at the end of the year.
While Musk has claimed it won’t need to raise more this year, some industry analysts disagree. Tesla “has indicated it does not need to raise capital in the past and still raised capital,” analysts at Cowen wrote earlier this month. Moody’s, which recently downgraded Tesla’s credit rating, said the carmaker will have to “raise a pretty significant amount of debt” to cover its cash burn. Investment banking firm Jeffries pegged that at $2.5 billion to $3 billion.
With that in mind, Tesla might be better off exporting its cars for now, Osborne says — even with China’s high import tax. “In that kind of über-luxury market, I think the Chinese buyer wants a Western brand with cachet,” he says. “Once you start getting north of $100,000 price point, the relative difference between $100,000 and $140,000 isn’t as big of a deal.”
If the taxes are lowered further, as China’s President Xi Jinping recently hinted, it could be all the more reason to wait on going full throttle with production in China. Not only have China’s own automakers benefitted from the joint venture structure, but Chinese EV startups pop up seemingly every week. “The market will get pretty crowded pretty quickly there,” Osborne says.
Most other manufacturers are already locked into joint ventures
The news from China today is unlikely to change the efforts of other automakers in the near term, both because it won’t apply to the manufacturing of conventional passenger vehicles for another four years, and because so many partnerships are already in place.
GM, the leading Western manufacturer in China by sales, said that it sees no change in its plans. “GM’s growth in China is a result of working with our trusted joint venture partners,” the company said in a statement to The Verge. “We will continue to work with our partners to provide high-quality products and services to consumers.”
Ford echoed similar sentiments. “We are encouraged by the announcement this afternoon from the National Development and Reform Commission, which is a clear demonstration of the Chinese Government’s commitment to further open the automotive industry,” the company wrote. “We will continue to monitor developments and look forward to learning more.” Other automakers like Volkswagen and Daimler could not be reached in time for publish.
As for why China is relaxing the rules in the first place, it’s possible that the nascent trade war with the US pressured the decision. But it also could be the case that China felt it has gotten what it wanted out of the joint venture program, Shanjun Li, professor of economics and policy at Cornell University, said in a statement. “Chinese domestic automakers have improved dramatically in their technology know-how during the past decades,” he wrote. “They are in a better position than ever to compete directly with international rivals for the domestic and international markets.”
In other words, as Trump might say: “mission accomplished.”