The Chinese government announced today that it plans to change the rules for foreign car manufacturers that want to manufacture vehicles in the country. It is a major change in the overall picture of American, Asian and European car manufacturers. It is also one that could benefit Tesla, although perhaps not without overwhelming the company, which is already stretching while trying to launch the Model 3 here in the United States.
Until now, foreign car manufacturers could not own more than 50 percent of the manufacturing efforts on Chinese soil. This forced automakers not only to share profits in what has become the largest auto market on the planet, but in some cases also share their experience, all as part of an effort to create a rising tide for companies Chinese car But now the Chinese government says it will lift those restrictions on electric vehicle manufacturers sometime later this year. It will eliminate them for commercial vehicles in 2020 and in conventional passenger vehicles in 2022.
Tesla has been successful in China despite high import taxes
Tesla exports its cars to China, and the company represents about 9 percent of the booming EV market. But those exports are subject to 25 percent import taxes. Recently, China threatened to add another 25 percent to the above during the recent escalation with President Trump (although since then he has talked about the possibility of reducing tariffs on car imports).
Most automakers have accepted the rule of the joint venture and have partnered with Chinese manufacturers to bypass this import tax, so that they can keep costs down for customers and access the market. Some, like GM and Ford, even have multiple associations.
Meanwhile, Tesla 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 with a Chinese automaker, but those efforts stalled recently. Musk was left tweeting in President Trump about China's import taxes and the joint venture rule, where he argued that it makes things "very difficult" and compares it to "competing in an Olympic race with lead shoes."
Rolling back the restrictions could pave the way for Tesla to finally secure its own manufacturing plant in China. Going alone could help you maximize profits in the burgeoning EV market there, one that will only grow as the country gradually closes internal combustion engines.
"This is definitely a great help for Tesla," Tasha Keeney, an ARK-Invest analyst, tells The Verge. And although Tesla has proven reluctant to partner with a Chinese automaker, Keeney points out that Tesla also has support from Tencent if it wants some local support. Tesla declined to comment on the change of rule.
"This is definitely a blessing for Tesla."
But Tesla is also balancing several turntables in the US. UU At this time, so manufacturing in China is not something that should take priority immediately, Jeffrey Osborne, senior research analyst at Cowen, tells The Verge.
"The investors we talk to are not necessarily jumping up and down," he says. Instead, they see it more as a positive long-term, if and only if Tesla can overcome its short-term problems, such as increasing the production of Model 3. "If you can not finish Model 3 nationally, then the sheet long-term route is not really there, "he says.
Keeney agrees. "Of course, we want Tesla to get the production process right here before building another factory in China," he says.
There is also the question of how Tesla will pay for a factory in China. The first reports in the process linked the price to about $ 9 billion, money that Tesla simply does not have at this time. The company consumed a large part of its cash reserves in 2017 in order to start up the production of Model 3, leaving it with $ 3,370 million in cash and cash equivalents at the end of the year.
While Musk has said he will not have to raise more this year, some industry analysts do not agree. Tesla "has indicated that he does not need to raise capital in the past and still obtain capital," wrote Cowen analysts earlier this month. Moody's, which recently downgraded Tesla's credit rating, said the automaker will have to "raise a significant amount of debt" to cover its cash loss. Investment banking firm Jeffries estimated that at $ 2.5 billion to $ 3 billion.
With that in mind, Tesla could be better off exporting its cars for now, says Osborne, even with China's high import tax. "In that kind of luxury market, I think the Chinese buyer wants a Western brand with cachet," he says. "Once you start to get north of the $ 100,000 price point, the relative difference between $ 100,000 and $ 140,000 is not that important."
If taxes are further reduced, as Chinese President Xi Jinping recently hinted, it could be another reason to wait at full speed with production in China. China's automakers have not only benefited from the structure of the joint venture, but Chinese electric vehicle startups appear every week. "The market will fill up pretty fast there," says Osborne.
Most other manufacturers are already locked in joint ventures
It is unlikely that news from China will change the efforts of other automakers in the short term, both because it will not apply to the manufacture of conventional passenger vehicles for another four years, and because there are already many associations.
GM, the leading Western manufacturer in China for sales, said it sees no change in its plans. "GM's growth in China is the 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 this afternoon's announcement by the National Development and Reform Commission, which is a clear demonstration of the Chinese government's commitment to continue opening up the automotive industry," the company wrote. "We will continue to monitor the developments and hope to learn more." Other carmakers such as Volkswagen and Daimler could not be contacted in time for publication.
As to why China is relaxing the rules in the first place, it is possible that the fledgling trade war with EE. UU You have pressed the decision. But it could also be the case that China felt it got what it wanted from the joint venture program, Shanjun Li, a professor of economics and politics at Cornell University, said in a statement. "Chinese national automakers have dramatically improved their technological knowledge over the past decades," he wrote. "They are in a better position than ever to compete directly with international rivals for national and international markets."
In other words, as Trump could say: "mission accomplished".