Will Tesla Seize The Opportunity As China Relaxes Rules For Foreign Automakers?

by Trefis Team
Tesla Motors
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Earlier this week, China indicated that it would remove a rule that required foreign automakers to enter into joint ventures with local manufacturers to operate in the county. The move could prove to be a positive for Tesla (NYSE:TSLA), which has witnessed rapid sales growth in the Chinese market, potentially allowing it to avoid paying import duties by setting up an assembly plant in the country without having to work with local partners.

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Why China Is Important To Tesla

The Chinese auto market has emerged the largest in the world, with over 28 million vehicles sold over 2017. Moreover, China appears to have embraced the electrification of its auto market at a much more rapid pace compared to many other countries. For instance, plug-in electric vehicles held about a 2.1% share of the total Chinese auto market in 2017, well above the U.S. and Europe, where the share stands at about 1.2% and 1.9%, respectively. Tesla currently counts China as its second-largest market after the U.S., and its share of revenues from the market has been growing (17% in 2017, up from 15% in 2016). Tesla’s Chinese sales stood at a little over $2 billion in 2017, marking an increase of about 90% on a year-over-year basis. As the market grows, it’s possible that China will be Tesla’s largest market in the near future.

EV Manufacturers Stand To Benefit From Rules

China levies an import duty of about 25% on automobile imports, and this significantly drives up the cost of Tesla’s vehicles in the Chinese market. Considering this, Tesla has been looking to open an assembly operation in Shanghai for a while now, but has not been able to agree on appropriate terms with the government. The company has apparently been pushing for 100% ownership of the manufacturing facilities, as it wanted to keep its intellectual property to itself. Under the new regulations, foreign auto companies can now hold 100% of their manufacturing entities in China, up from the previous limit of 50%. While the rule will be relaxed for passenger vehicles by the year 2022, electric car makers are likely to benefit more quickly, as investment restrictions could be lifted as soon as this year.

Tesla Could Still Choose To Hold Off On Manufacturing In The Interim

Although having a Chinese facility could help Tesla drive down costs and eliminate tariffs, stimulating demand, it’s possible that the company might hold off on its manufacturing plans in China in the interim. Last week, the Chinese government indicated that tariffs on imported vehicles could be significantly reduced from the current 25% this year, meaning that Tesla could continue to build its electric cars and SUVs at its Fremont facility, and export to China at potentially lower rates than before. Moreover, building out a new facility is going to be very capital intensive, and the company may not want to fund this in the near term as it continues to burn through cash. Tesla has also indicated that it would not be raising additional equity or debt this year, apart from its standard credit lines.

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