20 September 2019
Tesla is facing a capacity bottleneck as it fails to build its Model 3 quick enough to meet mounting orders. Photo: Telsa
Tesla is facing a capacity bottleneck as it fails to build its Model 3 quick enough to meet mounting orders. Photo: Telsa

Tesla could create a catfish effect in China auto sector

China will open its door wider rather than closing it since opening-up will bring advancement, Chinese President Xi Jinping said in his speech delivered during the 19th Party Congress.

Does Xi really mean what he said?

It has been reported that US electric-car maker Tesla Inc. has reached an agreement to set up a 100 percent owned manufacturing facility in Shanghai’s free-trade zone. Now, if this happens to be true, that would be the best testimony to Xi’s intention to further open up the China market.

In fact, the rumor that Tesla is in talks to build a factory in Shanghai has been circulating for more than a year. Tesla reportedly insists on being the sole investor to make sure it can keep its proprietary technology to itself.

Aiming to become the No. 1 electric car making country in the world, China apparently values Tesla’s potential investment a lot. Wang Yang, China’s vice prime minister, met Tesla founder Elon Musk in April, indicating how eager China is to bring Tesla in.

Another merit of having Tesla is to create a catfish effect, a term used in human resource management to describe how groups are motivated by the addition of a strong competitor. By having a competitor, homegrown auto firms would have to get better in order to survive in the market place.

It would also make a lot of sense for Tesla to set up a factory in China, which will not only save production and transport costs but more importantly help the Silicon Valley auto maker tackle the longstanding capacity bottleneck.

Tesla’s Model 3 has already received more than 500,000 orders worldwide. However, its US factory has only produced 220 cars so far, running far behind the target of delivering 1,500 cars by the end of the month.

Tesla plans to spend US$9 billion on the Shanghai factory. Construction will be completed in two years. The factory will manufacture Model 3 for China and overseas markets, according to the Wall Street Journal.

Tesla reaffirmed that it is talking with the Shanghai municipal government to set up a factory in the region and expects to agree on a plan by the end of the year but declined to comment on the report.

Currently, Tesla is facing some trouble in expanding its presence in China. It faces nearly 40 percent import tariff plus value-added tax, which means the same model car will be sold in China at double the price in the US market.

Nonetheless, Tesla still managed to sell 11,000 electric cars in China last year, generating one-seventh, or US$1 billion of its total sales revenue. China is already the company’s second largest market after the US.

So far, foreign automakers are not allowed to establish wholly owned factories in the country. They must all team up with a local partner to form joint ventures like BMW-Brilliance Automotive, Guangzhou Honda Automobile and Beijing Benz.

In this way, foreign automakers can be exempted from the 25 percent import tariff, but they have to share half of the profit with their local partner. Also, there is a risk that their core technology will be picked up by the local partner.

Tesla is keen to protect its exclusive technology in manufacturing electric vehicles. That’s why it doesn’t want to do a joint venture.

Some analysts said if Tesla is allowed to have a wholly owned unit in China. Such unprecedented arrangement may stoke complaints from other foreign automakers.

As such, a more likely arrangement is that Tesla may be allowed to have a majority share and its Chinese partner is not an automaker, which will help ease its concern for technology leak.

Meanwhile, if Tesla is on board, it may bring some short-term pain to local auto firms before the catfish theory kicks in.

Currently, Tesla’s Model 3 is priced at US$35,000 in the US, which is equivalent to the low to medium-range electric cars in China. Chinese rivals will be hard pressed to convince consumers to buy their models if Tesla is available at a similar price point.

This article appeared in the Hong Kong Economic Journal on Oct. 26

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist