Tesla Production Heads to China: Bull and Bear Case Explained

Tesla had been wanting to produce cars in China for some time. Trump's tariffs may have sealed the deal.

The Wall Street Journal reports Tesla Seals deal to Build an Auto Factory in Shanghai.

Supposedly, the factory will be capable of producing 500,000 cars a year. We have seen this kind of hype from Elon Musk before.

Although the numbers may be questionable, the deal itself isn't.

Money Needed

Bloomberg commented Tesla's Missing Number in China Factory Agreement: The Price Tag.

The preliminary agreement is a major development in Tesla’s more than yearlong effort to open China’s first production facility that will be wholly owned by a foreign carmaker. But the absence of detail about the size of the investment is turning heads because the Musk-led company had just $2.7 billion in cash at the end of the first quarter. Tesla has been burning through billions of dollars as it’s struggled to ramp up manufacturing of the Model 3 sedan.

“The biggest question right now for investors -- bulls and bears alike -- is how are they going to pay for it,” Ben Kallo, a Robert W. Baird & Co. analyst with the equivalent of a buy rating on Tesla shares, said in a Bloomberg Television interview. “They will have to get capital.”

Tesla sold 14,779 vehicles in China last year, according to data from LMC Automotive. That gave it about 3 percent of the nation’s battery-powered electric-vehicle market, placing it as the No. 10 brand in that segment. China accounted for 17 percent of Tesla’s 2017 revenue, according to a filing with U.S. regulators.

Service Question

How the heck do those Tesla China owners get service? It takes months here to get service. How long does it take in China?

And production in China has to be at least a year away.

Will china be the new producer of parts?

Funding Question

Baird asks: How are they going to pay for the new factory? “They will have to get capital.”

Let's return to the WSJ article for a possible answer.

Local Capital

Tesla does have at least one local ally, with internet giant Tencent Holdings Ltd. having spent $1.7 billion on a 5% stake in the electronic-vehicle maker last year, and raising local capital to help build the Shanghai plant shouldn’t be a problem.

“If there were an opportunity for Chinese investors to go into Tesla, they’d do it in a heartbeat,” Mr. Chao said.

Not Done Before

Tesla is doing something that no foreign auto maker has done before: build a factory and a network of suppliers in China without the support of a local joint venture partner. Also, the current U.S.-China trade dispute poses a risk to Tesla if the issues should create consumer backlash against American products.

Even so, China offers opportunities for growth—especially with electric vehicles—and building its own plant allows Tesla to keep all the revenue it generates, instead of having to share it with a Chinese partner, said James Chao, Asia-Pacific automotive director at IHS Markit .

“They’ll be able to control the process far more tightly than a [joint] operation.,” Mr. Chao said. “It frees them to build this the way they want to.”

China is already Tesla’s second-biggest market after the U.S. The auto maker sold about 17,000 cars there last year, compared with roughly 50,000 in the U.S. and 103,000 globally.

In China, sales of electric vehicles are rising quickly, boosted by government policy. Chinese customers are projected to buy 3.5 million electric passenger cars in 2022, IHS Markit forecasts, up from 580,000 last year.

Enormous Electric Market

China is a big market and Tesla is going right after it. Those cars will be produced in China, not here.

Tesla wanted to build cars in China all along, but what may have sealed the deal is Trump's trade policy.

The WSJ noted "Beijing finally confirmed plans in April to phase out rules that have forced all traditional foreign makers, including Ford Motor Co. and General Motors Co., to manufacture cars with Chinese partners to avoid paying steep import tariffs."

Batteries

In the tit-for-tat trade war, China upped tariffs on US autos and parts to 40%.

I suspect Tesla's battery production, currently in Nevada, will also head to China.

More Winning

Does anyone have a complete scorecard for all this winning? I am struggling to keep track of it all.

Tesla Viable?

I have commented several time I am neither long not short Tesla.

Bears now have a strong reason to worry.

It is likely China helps with all of Tesla's funding requirements, at least as far as building a factory in China goes.

Labor costs in China would undoubtedly plunge.

The Bull concerns are quality, timeframes, fraudulent statements, and Trump.

Even if Tesla does produce a profit, there are also P/E and debt issues.

Tesla Monthly Chart

Lesson on Shorting Story Stocks

Shorting story stocks before they break is a tough go. Those who bought the breakout at $50 are sitting on huge profits.

The market, for whatever reason, still respects this company despite the obvious and blatant lies of Elon Musk.

If Tesla can make 500,000 quality cars in China, perhaps it can turn a profit.

Fast enough to stop bleeding money? And what about the SEC, debt, and P/E ratio? Those are key questions now.

But here's the biggie:

How Will Trump Respond?

Who knows how Trump may respond to Tesla's plans to build a factory in China?

I don't, nor does anyone else. History says Trump does not need a legitimate reason to do anything.

It is conceivable Trump blocks Tesla from going to China on security grounds. He can easily cite battery technology or something else floating in the air.

Should that happen, Tesla would crater. If the SEC goes after Tesla, the stock will also crater.

If not?

Your answer to that question determines whether you are a bull, a bear, or sitting on the sidelines eating popcorn in amusement.

Mike "Mish" Shedlock

Comments (17)
No. 1-17
Carl_R
Carl_R

So long as Trump continues to have a tariff on manufacturing inputs (steel, aluminum, chips), manufacturers will continue to move production overseas, where steel, aluminum, and chips will cost them significantly less. In the process they will save on labor as well.

Of all the things you could put tariffs on, why would anyone choose manufacturing inputs rather than manufacturing outputs (i.e. finished products)?

tz1
tz1

Tesla can't make cars in the USA. Is there even one of those "swap batteries in a minute" station anywhere in the USA as they showed in a well publicized demo? China will STEAL the tech, and the best parts and do their own government backed / crony thing. Cheaters do prosper when the marks are too stupid and in a legal environment biased to the cheaters.

Brian1
Brian1

Musk wants intervention. Then he'll have another excuse.

2banana
2banana

Somehow I don't see the Chinese government giving Musk billions in taxpayer subsidies and giving each Chinese a $13k subsidy for buying a Tesla.

But I do see the Chinese stealing his technology (as he is forced to partner with a Chinese firm) and putting him out of business.

Wagner_4
Wagner_4

According to most Tesla bashers (including short sellers) Tesla does not have any special technology.

So there should not be anything to steal.

Or is there?

P.S. China recently changed the laws so that Tesla could own 100% of the company instead of having to find a local partner.

SleemoG
SleemoG

Musk, like Trump, is a cult leader.

2banana
2banana

I see Tesla losing any IP they ever had...

"Chinese-designed "Dhyana" x86 processors based on AMD's Zen microarchitecture are beginning to surface from Chinese chip producer Hygon."

https://www.tomshardware.com/news/china-zen-x86-processor-dryhana,37417.html

2banana
2banana

Of course - because it is the only way to play in China. 100% technology transfer.

How do you think this is going to end for AMD?

And for Tesla...

Brian1
Brian1

That's a rather antiquated architecture from AMD, that's why they licensed it to the Chinese. There's a big leap from that to modern designs. Not the same for copying Tesla's Model S and X whose batteries are based on 18650 cells that were produced in China in the first place.

2banana
2banana

@Brian1

Funny - you don't need a 100% IP transfer to sell goods in America. Or partner with an American company that will steal your IP.

But free trade!!!! We can't fight back. Because that would crazy Trump talk.

"That's a rather antiquated architecture from AMD, that's why they licensed it to the Chinese."

Onni4me
Onni4me

Chinese quality at its best? Well, I am sure they do somewhat good quality at least in the bigger and better organised companies but the providers quality varies. That said, I have no trust in Tesla managing any better in China than it does in the USA. This move will be the one to make or brake the company. I bet for the latter but remain in the popcorn crowd.