Why Tesla invests in China

Facing the challenge
Established in 2003, Tesla only manufactures pure electric vehicles. Its headquarter located in the silicon valley of California, the United States. Tesla integrates unique modeling, efficient acceleration, good handling performance, and advanced technology, making it the fastest and most fuel-saving vehicle on the road. In the nearly 15 years since its founding, it has made profits in only two quarters.

Tesla has been losing money in recent years, despite increasing production and deliveries of electric cars. Tesla reported a loss of $889 million in 2015, $675 million in 2016, and $2.2 billion in 2017. In the first quarter of 2018, Tesla has lost $785 million. Just as Tesla hit its goal of producing 5,000 vehicles a week in the final week of the second quarter of 2018, it announced that Doug Field, its chief engineer, was leaving the company. About 20 executives left in 2017, according to media reports. About 50 executives have left in the past five years or so.
Faced with the danger of bankruptcy, Tesla’s priority is to reduce costs. The localization of the factory in Shanghai will save a lot of costs for Tesla.

Reducing the costs
As the world’s largest auto market, China’s importance to Tesla is self-evident. According to the data, Tesla’s sales in China reached 1 billion dollars in 2016 and 2.027 billion dollars in 2017, an increase of more than 90% compared with 2016, accounting for nearly 20% of the total sales in that year. China has also become Tesla’s second-largest market after the United States. Although there is no import tariff exemption for the electric cars produced in the free trade zone to be sold in mainland China, according to the formula of selling price in China published by Tesla: selling price in China = selling price in the United States * exchange rate + transportation and handling fees + tariffs and other taxes + VAT. After localization, the Model X with a selling price of about 930-1.57 million yuan, which means, this action can save Tesla more than 100,000 yuan in transportation, loading and unloading fees and purchase tax costs.

Moreover, Shanghai locates in the Yangtze river delta, one of China’s six major automotive, industrial clusters, which brings together a large number of auto parts enterprises. After localization, the cost of Tesla in related procurement and transportation will be reduced.

According to the Xinguang Jia, who is the chief analyst, of China automotive industry consulting development company, “The location of Tesla’s factory in China proves that Chinese market is an important part for Tesla. One of the reasons behind this is the strong demand in China and the high recognition of Chinese consumers for Tesla’s products. It is expected that Tesla will achieve an extraordinary development in the Chinese market.”

Looking for cooperation
The big question now is how Tesla will pay for it and how they will have to get more capital. In this pure electric vehicle project, Tesla plans to produce 500,000 pure electric vehicles annually. Therefore, in addition to reducing costs, Tesla is now actively seeking cooperation. Raise enough capital to build a factory in Shanghai. Analysts from PWC say that half a million units of capacity are slowly coming off the ground, that 100,000 units will cost little in the early stages and that local governments may provide much support for free.

Musk has previously said Tesla would achieve positive cash flow this year. Shanghai government said in a statement that it might help Tesla in this regard. The Shanghai government will “fully support the construction of the Tesla manufacturing plant,” the statement said. In addition to working with local governments, tesla’s Shanghai super factory will also team up with battery makers.

Panasonic said it would consider further investments in Gigafactory, tesla’s Nevada super battery plant if it needed to. Panasonic is the exclusive battery supplier of Tesla’s current mass production models and manufactures batteries in Gigafactory factories in Japan and Nevada, USA. Panasonic has already invested about $1.6bn in Gigafactory, a joint battery plant. “I think you’re going to see Tesla take a similar approach to the Nevada plant in China and look for a partner like Panasonic,” says Mr. Callow, an analyst at investment bank Bayard. “I’m not saying Panasonic is a partner in the Chinese plant, but you’re going to see someone gets involved. I think these details will be announced in the next month or two or three months.

 

Siqi Du

2019 Full-time MBA