Tesla (NASDAQ:TSLA): China is Key to Its Future

Tesla (NASDAQ:TSLA): China is Key to Its Future

Tesla (NASDAQ:TSLA): China is Key to Its Future


China is Key to Tesla’s future, and so it is not surprising that the US-China trade dispute is hitting the company hard.

China is Tesla’s largest market outside the US, accounting for about 10% of total revenue in the 1st 3-Q’s of Y 2018, and the M-3 is not available there yet.

The company sold about 15,000 of its more expensive M-S and M-X models in China last year, according to research estimates.

Since the country raised the tariff on US car imports to 40% in July from the 15% it charges on non-US auto imports, in retaliation for The Trump Administration’s tariffs on Chinese goods, Tesla’s China revenue has fallen 27.5% in Q-3 of this year compared with the same frame last year, according to company filings

The China Passenger Car Association said recently that Tesla sales fell further in October. Tesla said last month it was reducing Model S and X prices 12% to 26% under tariff pressure.

Like much of the stock market, Tesla shares were Monday on reports of a trade truce between President Trump and Chinese President Xi Jinping.

Tesla last month began taking reservations in China for its more affordable M-3 sedan, which is expected to start shipping “early next year,” CEO Elon Musk said.

Considering its starting price at $46,000 in the US compared with $78,000 for a M-S with options that can push the price well over $100,000, a 40% tariff on the M-3 could devastate sales in China.

But if Tesla follows through with its plan to build a big factory in China, tariffs will not matter as much. The plant, to be near Shanghai, would manufacture M-3s and a new M-Y crossover. Building the cars in China could reduce prices by 33%, even without taking the tariffs into account, Mr. Musk says.

“It’s really the only way to make the cars affordable in China,” he told automotive analysts last year.

But right now the project is little more than an empty expanse of land in Shanghai, which Tesla procured by signing a long-term lease in October. The project awaits a government license, and no financing has been announced, except the Mr. Musk is making very positive projections about his company’s success in China in Y 2019.

Mr. Musk has said Tesla will rely on loans from Chinese banks, that may or may not happen.

The project had been set to begin producing cars by Y 2020, but Mr. Musk told analysts in October the plant would be “active” sometime in Y 2019. Analysts did not ask him what “active” meant.

Mr. Musk alluded to “low capital costs” in the plant’s early stages, relying more on manual labor than on advanced technology, akin to the assembly line the company built in a parking lot under a tent in Fremont, CA, this year.

If the deal goes through, it would be the 1st time China has allowed a foreign company to manufacture cars on its own there.

To date, a joint venture with a Chinese company has been required. General Motors (GM), Ford (F), Volkswagen (VLKAY), Toyota (TM), Honda (HMC) and other major automakers operate in China on that basis only

The Trump Administration has raised complaints about China forcing companies to give up proprietary technology for access to the China market. A Shanghai official was quoted this year saying technology transfer for the Tesla project is “subject to negotiations.”

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