Will Tesla’s Shanghai Factory Be A Game Changer For The Company?

by Trefis Team
Tesla Motors
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In its quarterly production report published on Monday, Tesla (NYSE:TSLA) indicated that higher tariffs on its automobiles were hurting its performance in China, the world’s largest market for electric vehicles. The Chinese government has raised tariffs on imports of U.S. automobiles as the trade war between the two countries intensified, forcing Tesla to speed up the construction of its Chinese manufacturing facility located in Shanghai. While Tesla didn’t provide additional details about the accelerated construction activities, the new facility will be crucial to the company’s growth plans in the world’s largest EV market.

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A Chinese Plant Could Create A More Level Playing Field For The Company

Tesla has a significant disadvantage in China, considering that it faces a 40% tariff levied on vehicles it imports from the U.S., compared to other imported vehicles which face tariffs of just 15%. Moreover, the company’s cars are not eligible for the cash incentives (typically ~15% of MSRP or more) that are available to locally produced EVs. Tesla says that accounting for import tariffs and transport costs, the company is operating at a 55% to 60% cost disadvantage compared to similar cars being produced in China. However, Tesla reached an agreement with Chinese authorities back in July to build a plant that includes both vehicle and battery manufacturing in a move that could help create a more level playing field for the company. Tesla previously indicated that the factory could be commissioned in two years, with its production rate potentially approaching 50k vehicles within five years. The plant, which is expected to cost roughly $2 billion, is to be funded via Chinese debt.

China Is A Massive EV Market

China has become the largest auto market in the world, with over 28 million vehicles sold over 2017. Moreover, China has embraced the electrification of its transport industry at a quicker pace compared to many other countries. For instance, plug-in electric vehicles (PEV) 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% share in 2017, up from 15% in 2016). Tesla’s sales from China stood at a little over $2 billion in 2017, marking an increase of about 90% on a year-over-year basis. As the market expands, it’s possible that China will be Tesla’s largest market in the near future.

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