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Why Tesla’s Relationship with China Is Complicated

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China’s EV market

China is the world’s largest auto market followed by the United States. In terms of 2017 sales volumes, China was the largest EV (electric vehicle) market. 

This could be why, apart from legacy automakers (FXD) such as General Motors (GM), Ford Motor Company (F), and Toyota Motor (TM), EV maker Tesla (TSLA) is interested in expanding its presence in China.

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Unfair treatment in China

According to the China Association of Automobile Manufacturers, ~777,000 units of new energy vehicles were sold in the country in 2017. Note that the term “new energy vehicle” includes hybrid, fuel-cell, and electric vehicles. The association expects new energy vehicle sales to be over 1 million units in 2018.

In 1994, China began implementing a rule that made it compulsory for foreign automakers to get into 50-50 partnerships with local market players. During Tesla’s 3Q17 earnings call, its CEO, Elon Musk, confirmed the company’s plans to invest in a Chinese assembly plant. According to Musk, Tesla would primarily localize the production of Tesla’s affordable cars, the Model 3 and the Model Y, in China. However, he also suggested that this plan was going to take about three years to materialize.

Interestingly, China’s EV market is ruled by low-priced electric cars produced by local manufacturers. Therefore, it’s not going to be easy for Tesla to sell its comparatively expensive cars in China even after localizing its production in the country.

Musk on China

On March 8, Musk joined a Twitter discussion about import duties and tariffs. In a series of tweets, he pointed out some harsh facts about China, such as the fact that “no US auto company is allowed to own even 50% of their own factory in China, but there are five 100% China-owned EV auto companies in the US.”

Musk also suggested that it’s not fair for China to charge US automakers a ~25% import duty while the United States charges only a 2.5% import duty to Chinese automakers.

On March 13, Reuters reported that the Shanghai government had stated that its talks with Tesla were on track to permit the carmaker to localize its manufacturing in China.

Shanghai’s clarification on the matter could put an end to speculation that China isn’t interested in allowing Tesla build its cars in the country. Nevertheless, considering China’s local EV market, Tesla could continue to face many challenges in the country other than policy issues going forward.

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