Elec­tric Dreams

Af­ter years of hes­i­ta­tion, Tesla fi­nally inked a deal that means it will be­come the first wholly for­eign-owned auto maker in China. Can the Chi­nese new en­ergy ve­hi­cle in­dus­try re­spond?

NewsChina - - CONTENTS - By Min Jie and Li Jia

US elec­tric car com­pany Tesla has earned re­spect as an in­no­va­tor and dis­rupter in tech­nol­ogy, but it has yet to prove it­self a suc­cess as a busi­ness. It has been dogged by fore­casts and ru­mors of bank­ruptcy ever since it was founded in 2003 by charis­matic but con­tro­ver­sial CEO Elon Musk, af­ter years of an­nual losses. Af­ter it dis­closed its lat­est quar­terly fi­nan­cial re­sults on Au­gust 1 at NAS­DAQ, the com­pany fi­nally de­clared that it ex­pected to “be­come sus­tain­ably prof­itable for the first time” af­ter it reached its mass pro­duc­tion goal of 7,000 ve­hi­cles per week in the last week of June, but not un­til af­ter a huge ex­tra push. It plans to in­crease its ca­pac­ity fur­ther.

Tesla's con­fi­dence in its fu­ture is ap­par­ently not only built on its Gi­gafac­tory 1 near Reno, Ne­vada, but also on its new Gi­gafac­tory 3 in Shang­hai. On July 10, Musk signed a me­moran­dum of un­der­stand­ing with the Shang­hai mu­nic­i­pal gov­ern­ment to build Tesla's first pro­duc­tion fa­cil­ity out­side the US.

Spec­u­la­tion over Tesla's in­ten­tion to build plants in China have been swirling for some time, and the re­cent deal in Shang­hai was made pos­si­ble by China's fur­ther openingup of its auto in­dus­try which will en­able for­eign au­tomak­ers to wholly own their fa­cil­i­ties.tesla's foot­print is ex­pected to re­shape China's fast ris­ing mar­ket of new en­ergy smart au­tos.

New ‘Dread­nought’

Gi­gafac­tory 3 will be the largest for­eign-funded man­u­fac­tur­ing project that Shang­hai, al­ways in the van­guard of China's re­form and open­ing-up process, has ever at­tracted. While Tesla pro­duces bat­ter­ies at its Ne­vada base – the world's big­gest build­ing once it is com­plete – and as­sem­bles ve­hi­cles in Cal­i­for­nia, the Shang­hai op­er­a­tion will man­u­fac­ture bat­ter­ies and ve­hi­cles, as well as host re­search and de­vel­op­ment fa­cil­i­ties. The fac­tory will be an ex­am­ple of what Musk has dubbed the “Dread­nought” – a ref­er­ence to the amount of ro­bot­ics and au­to­ma­tion his fac­to­ries have, US busi­ness news por­tal CNBC re­ported in June. A dread­nought was orig­i­nally the name of the first type of mod­ern war­ship built in the early 1900s.

Tesla's Q2 fi­nan­cial state­ment says the com­pany is “ex­cited” about the mar­ket op­por­tu­nity in China which is “by far the largest EV [elec­tric ve­hi­cle] mar­ket in the world” and which of­fers “ex­cep­tion­ally strong” sup­port for EVS. Since 2015, buyers of new en­ergy ve­hi­cles, which in­cludes fully elec­tric and hy­brids, can get gov­ern­ment sub­si­dies. The pol­icy was ad­justed in 2016 and 2018 with higher tech­ni­cal stan­dards. The cur­rent ad­just­ment be­gan in June and will be ef­fec­tive till 2020.

Ac­cord­ing to the China As­so­ci­a­tion of Au­to­mo­bile Man­u­fac­tur­ers (CAAM), both pro­duc­tion and sales of new en­ergy ve­hi­cles in the first half of 2018 al­most dou­bled over the same pe­riod of 2017. The mar­ket is dom­i­nated by EVS, and the gov­ern­ment is in­vest­ing heav­ily in in­stalling more charging sta­tions. Although most for­eign new en­ergy ve­hi­cles do not qual­ify for the sub­si­dies, the fast ex­pand­ing mar­ket and im­prov­ing in­fra­struc­ture means more op­por­tu­ni­ties for all play­ers. To re­duce pol­lu­tion and con­ges­tion, some cities in China, in­clud­ing Bei­jing and Guangzhou, have sys­tems to limit the num­ber of gaso­line-fu­eled ve­hi­cles on the roads, but new en­ergy ve­hi­cles are ex­empt.

Tesla out­shone Chi­nese and other in­ter­na­tional brands of EVS as soon as it en­tered China in 2014. Like in the US, many Tesla own­ers in China are rich, fa­mous and want to put forth a pub­lic im­age of be­ing cool and car­ing about the en­vi­ron­ment. The first buyers in China in­cluded IT lead­ers like Charles Chao, CEO of Sina, one of China's lead­ing web por­tal, Li Xiang, founder of Au­to­home, an on­line ser­vice plat­form for auto con­sumers and Lei Jun, founder and CEO of smart­phone maker Xiaomi.

“Tesla's Model S and Model X are suc­cess­ful in China's high-end mar­ket. Its more af­ford­able Model 3 is yet to be mass-pro­duced. How­ever, Chi­nese con­sumers are ready to ac­cept the price and per­for­mance of the Model 3,” said Xu Haidong, as­sis­tant to the gen­eral sec­re­tary of CAAM. Ac­cord­ing to Tesla's an­nual re­port, sales rev­enues in China nearly dou­bled in 2017, gen­er­at­ing 17 per­cent of the com­pany's to­tal, up from 15 per­cent in 2016. This was achieved de­spite the hefty pre­mium Chi­nese con­sumers have to pay for a Tesla ve­hi­cle – nearly twice as much as a buyer in the US, due to im­port tar­iffs and other fees. For ex­am­ple, de­pend­ing on which make and model, a Tesla Model S or X re­tails for any­where be­tween US$130,000230,000 in China. In the US, a Model S re­tails for around US$75,000 up to around US$135,000. A Model 3 re­tails in the US for around US$35,000 – although, CNN re­ported in May, if you take ad­van­tage of all the up­grades, the price will dou­ble. And Tesla had yet to start pro­duc­ing the ba­sic model, although it an­nounced it aims to ramp up pro­duc­tion to 10,000 units per week in the US in 2019.

Court­ing the Com­pany

The huge mar­ket po­ten­tial and high prices in China gave Tesla huge in­cen­tives to base a pro­duc­tion fa­cil­ity here, although due to its lead­ing po­si­tion in the in­dus­try, the firm would never be short of of­fers any­where in the world. The fight among sev­eral US states to host Tesla's first Gi­gafac­tory in 2014 drew a lot of me­dia at­ten­tion, which an­a­lysts pointed out Tesla ex­ploited to get the con­di­tions the po­ten­tial suit­ors were will­ing to of­fer.

It seemed that Tesla re­peated this tac­tic in China. In May 2014, Musk at­tended

a rib­bon cut­ting cer­e­mony at the launch of a Tesla charging sta­tion in Shang­hai's Pudong District, the largest out­side the US at the time. Ding Lei, then vice director of Pudong District gov­ern­ment, led ne­go­ti­a­tions with Tesla on pos­si­ble co­op­er­a­tion. As he told Newschina, he talked with all Tesla busi­ness depart­ments and in­vited them to build plants in Shang­hai. At the end of the year, Tesla in­formed him that the time was not right to pro­duce ve­hi­cles in China. From time to time, re­ports sur­faced that other com­peti­tors, in­clud­ing Guang­dong Prov­ince and Suzhou in Jiangsu Prov­ince, also known for their pros­per­ity and busi­ness friendly en­vi­ron­ment, were mak­ing over­tures to Tesla – re­ports which the com­pany de­nied. As yet, there are no de­tails on any in­cen­tives Shang­hai of­fered to Tesla. But the me­trop­o­lis, which al­ready pro­duces Volk­swa­gen and Gen­eral Mo­tors ve­hi­cles, has a fully fledged auto man­u­fac­tur­ing sup­ply chain which is prob­a­bly bet­ter than any other city in China.

It may be no co­in­ci­dence that Tesla fi­nally took the leap to man­u­fac­ture in China just as trade ten­sions be­tween China and the US are es­ca­lat­ing. China slashed its av­er­age tar­iffs on im­ports of ve­hi­cles and auto parts to 15 and six per­cent re­spec­tively, but hiked du­ties on au­tos from the US to 40 per­cent to re­tal­i­ate against the tar­iffs im­posed on some Chi­nese im­ports to the US. Tesla had to in­crease its al­ready ex­pen­sive prices in China. Since there is lit­tle sign that trade re­la­tions be­tween China and the US will re­turn to busi­ness as usual any­time soon, there is more ur­gency for Tesla to start pro­duc­tion in China.

Cap­tur­ing the EV Mar­ket

The big­gest bar­rier had al­ways been China's in­sis­tence on 50-50 joint ven­tures in auto man­u­fac­tur­ing, but Tesla re­fused to coun­te­nance such an ar­range­ment. This bar­rier was re­moved in April, when China an­nounced this pol­icy was to be lifted on new-en­ergy ve­hi­cles and ve­hi­cles for spe­cial pur­poses in 2018. The pol­icy will be ap­plied to ve­hi­cles for com­mer­cial pur­poses in 2020 and for all other ve­hi­cles in 2022.

Tesla es­ti­mates it will take three years for the first ve­hi­cles to roll off its Shang­hai pro­duc­tion lines. The planned an­nual out­put is 250,000 units ini­tially, and will in­crease to 500,000 later. But in the first half of 2018, Tesla pro­duced no more than 100,000 ve­hi­cles in the US, although it ex­pects to reach 350,000 ve­hi­cles per year soon. The plant in Shang­hai would clearly strengthen Tesla's fi­nan­cial po­si­tion, which has been be­dev­iled by poor pro­duc­tion ca­pac­ity for years, and lately by fluc­tu­at­ing share prices, fol­low­ing a se­ries of con­tro­ver­sial state­ments and tweets from Elon Musk, who re­cently tweeted that he was ready to take Tesla pri­vate, CNBC re­ported.

There is no doubt that Tesla will in­ten­sify the al­ready fierce com­pe­ti­tion in China's new en­ergy smart auto mar­ket. Ding thinks Tesla will con­cen­trate on the Model 3 in China, and it will be priced from US$30,00044,000, a bat­tle­field that both lux­ury and or­di­nary brands want. He noted that Chi­nese com­peti­tors had to race both time and Tesla.

“Tesla's move to man­u­fac­ture in China brings great pres­sure to both the do­mes­tic

and global EV mar­kets,” Xu from CAAM told Newschina. He ex­plained that do­mes­tic brands have yet to catch up with Tesla in terms of gain­ing con­sumer recog­ni­tion. They are do­ing well in the low-end mar­ket, but have yet to catch up in the mid­dle­and high-end mar­ket of ve­hi­cles cost­ing US$30,000 and above. They will have to com­pete with Tesla in terms of the best per­for­mance that their prod­ucts can de­liver in a con­sumer friendly way.

Both Xu and Ding agreed that pres­sure from com­pe­ti­tion can re­sult in sig­nif­i­cant progress in the sup­ply chain in the new en­ergy and smart ve­hi­cle in­dus­try in China. Ding re­called that all parts and com­po­nents made in China had to be tested in Ger­many be­fore they could be used on the assem­bly lines of VW'S joint ven­ture with the Shang­hai Au­to­mo­tive In­dus­try Cor­po­ra­tion in the late 1980s. But this strin­gent test­ing laid a solid foun­da­tion for the de­vel­op­ment of China's auto parts in­dus­try. In the past few years, there has been a surge of new com­pa­nies in­vest­ing in new en­ergy and smart au­tos, started by young tech-savvy peo­ple from in­ter­net com­pa­nies – re­ferred to in China as a new force in auto mak­ing. Many were in­spired by Tesla and Musk. Peo­ple with rich ex­pe­ri­ence in auto mak­ing also sensed the time was right, ei­ther work­ing for the new start-ups, or start­ing their own busi­ness.

Be­fore join­ing the gov­ern­ment in 2011, Ding Lei had worked with VW and Gen­eral Mo­tors in Shang­hai for more than 20 years. Re­al­iz­ing there were new op­por­tu­ni­ties in the ve­hi­cle sec­tor, he quit his job as an of­fi­cial to co-found Huaren Tech­nol­ogy R&D Co Ltd in 2017. The Shang­hai-based com­pany fo­cuses on new en­ergy and smart trans­porta­tion prod­ucts, and, Ding said, it was Tesla's ini­tial re­fusal of his in­vi­ta­tion that fu­eled his en­thu­si­asm and am­bi­tion to make new en­ergy cars. With an in­ter­na­tional team with rich ex­pe­ri­ence work­ing at lead­ing global auto brands, in­clud­ing Ford, Gen­eral Mo­tors and Jaguar Land Rover, Ding is con­fi­dent that he can com­pete with Tesla in China, and even the world mar­ket.

Tesla's Gi­gafac­tory 3 in China is yet to break ground, but the game is al­ready on.

Elon Musk, founder and CEO of Tesla

Car fans crowd to catch a glimpse of a Tesla

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