Tesla’s Downside If Musk Is Arrested in China

by Trefis Team
-52.02%
Downside
1404
Market
673
Trefis
TSLA
Tesla Motors
Rate   |   votes   |   Share

As Tesla (NASDAQ:TSLA) expands quickly in China, how exposed is Tesla to Elon Musk’s possible entanglement with Chinese authorities? Is this silly to ask? Perhaps as ridiculous as the possibility of a pandemic before it all started. There have, in fact, been hiccups with high profile foreign executives detained in China, as we detail below. With trade tensions between the U.S. and China remaining high, investors should not discount such possibilities.

Here’s the thing. Of course, Elon Musk is outstanding. However, his volatile temperament and squabbles with government authorities ranging from the SEC to local health officials in Alameda County, California, have grabbed many headlines. Now Tesla is quickly expanding operations in China – deliveries are scaling up from the company’s Shanghai plant, and demand is soaring post the Covid-19 related lockdowns. (See our interactive analysis How Will Tesla’s Strong Q2 2020 Deliveries Impact Earnings?) This likely means that Elon Musk is going to be traveling there a lot, interacting a lot more with Chinese regulators, suppliers, customers, and the Chinese government – that, directly or indirectly, owns many of these small and large entities. What risk does this present to Tesla stockholders? The short answer is – Musk should NOT want to mess with Chinese authorities.

While we’re enthusiastic about Tesla’s upside potential, in addition to its massive opportunity in the self-driving space (Just How Far Ahead Is Tesla In The Self-Driving Race?), we focus the analysis below on this specific outlier risk. In fact, here are a few examples of China arresting and “detaining” high profile foreign businessmen. 

To Help Understand This Better, We Spotlight A Few Such Cases:

In early June 2019, an executive at Koch Industries was detained at his hotel in southern China and was interrogated for several days. The executive was allowed to fly out of the country only after the U.S. State Department intervened. The detention came after a key executive of China’s telecom equipment behemoth Huawei was arrested in Canada at the request of U.S. officials. [1]

In 2010, an Australian citizen who was the head of mining major Rio Tinto’s iron ore operations was sentenced to 10 years in prison in China after he was charged with corruption and misappropriating commercial secrets. The arrest came at a time when the company and China were apparently in intense negotiations over the iron ore benchmark price. [2]

So If Musk Does Get In Trouble, And Is Detained In China, What Could Happen Next?

The situation could take one of two paths.

The first, a more likely and a more desirable outcome for everyone, isn’t necessarily going to be easy for investors to stomach. Tesla stock is likely to react violently. A 30% to 40% drop over a matter of days of such news cannot be ruled out. This will primarily be led by emotion, but the rational thinkers will point to significant discounting necessary for Tesla’s prospects in China post such an event. Depending on how deep these speculations run, the media frenzy, and the specific accusation leveled by the Chinese on Musk, the drop in Tesla stock could be much, much more. However, it’s likely the U.S government will intervene quickly, relationships with China are likely to sour – China might ask for something in return to overlook Musk’s mistakes and to let him go. This might all happen behind the scenes while Tesla stock will suffer significant volatility, and ultimately recover, but only partially, given reduced potential for Tesla’s business in China.

A second, more grave scenario is if the detention and issue turn out to be more prolonged. While this is less likely, and once again, as much as we do not like to imagine the scenario – it is possible. In this case, if the issue escalates with the involvement of the two governments at the highest levels, the impact on Tesla’s stock, and potentially even the broader market, is likely to be much more.

Should investors worry about such risks? We believe it’s often what we don’t foresee that catches us at our worst, brings out the suboptimal in us. In that spirit, and as such, we recommend prudent investors should absolutely prepare for such risks in the context of their broader portfolio holdings, and consider adjusting weights to suit their risk appetite.

Is this a good time to jump into Tesla stock? Yes – especially if you believe in this one important Tesla metric: Tesla’s time horizonOn the flip side, for a more balanced, risk-adjusted view, see our analysis Tesla Valuation: Jump Into Tesla, Wait, Or Get Out? 

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams

Notes:
  1. Koch Executive’s Harassment in China Adds to Fears Among Visitors, New York Times, June 2019 []
  2. China seeks to reassure U.S. executives as concerns rise of retaliation over Huawei CFO’s arrest, Politico, December 2018 []
Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!