Posted on September 22, 2019 by Shankar Narayanan
For many years, Tesla wanted to carve its place in the Chinese auto segment, but China remained a distant dream for the Silicon Valley based electric car maker. The highly regulated Chinese market has always been difficult terrain for overseas companies and continues to remain so to this day. But the size and growth opportunity presented by the world’s most populous nation was hard to ignore.
Above: Tesla's Model 3 (Photo: Kimia Jarrahian)
Nearly 68% of respondents to a survey conducted by US-China Business Council said that China is a top-five priority, while 66% said that they “suspect but are not certain” if Chinese companies are heavily subsidized to their advantage.
Most US-based corporations believe that China's regulations and policies are a huge disadvantage but the market is still worth the risk. It’s of no real surprise that well-known CEOs of US-based corporations, including Tim Cook, Elon Musk, and Mark Zuckerberg, keep visiting China.
According to the New York Times, "At a White House dinner in 2015, Mr. Zuckerberg had even asked the Chinese president, Xi Jinping, whether Mr. Xi might offer a Chinese name for his soon-to-be-born first child — usually a privilege reserved for older relatives, or sometimes a fortune teller. Mr. Xi declined, according to a person briefed on the matter.”
A CEO engaging in a charm offensive to expand his business is not unusual, but not all efforts go according to plan. Facebook is still waiting for clearance to operate in China, and many US companies believe that the playing field is not even.
Instead of rolling out regulations to slow things down, China is actively supporting Tesla’s plan to start local production. In April 2018, China announced that it will scrap its 50% ownership cap on foreign carmakers, paving the way for Tesla to retain complete ownership of its business in the country.
“The state planner, the National Development and Reform Commission (NDRC) said on Tuesday that China will scrap limits on companies making fully electric and plug-in hybrid vehicles in 2018, commercial vehicle makers in 2020 and lift restrictions on the wider passenger vehicle market by 2022”, reported South China Morning Post in April 2018.
What makes the statement interesting is the timeline for relaxing the norms: Companies building fully electric and plug-in hybrid vehicles in 2018 and wider passenger vehicle market by 2022.
Above: A look at rapid progress and recent developments at Tesla's Gigafactory 3 in Shanghai, China (YouTube: 瓦乌 wuwa)
Whoever drafted the statement knew fully well that when they add the term 'fully electric', Tesla will embrace the move with all its heart. After all, Tesla has been negotiating with Chinese policy makers for quite some time before the announcement.
Both China and Tesla haven’t looked back since the April 18th announcement; Tesla is racing against the clock to get Gigafactory 3 in Shanghai ready for production, while China is doing whatever it can to help.
In March this year, a group of state-run banks, China Construction Bank Corp, Agricultural Bank of China Ltd., Industrial & Commercial Bank of China Ltd., and Shanghai Pudong Development Bank Co., loaned Tesla $521 million to build its Gigafactory in Shanghai.
Chinese authorities recently announced that Tesla’s electric vehicles will be exempt from a 10% purchase tax, an exemption that has only been available for domestic electric vehicle manufacturers.
Above: Tesla's Model 3 (Photo: Kimia Jarrahian)
Not just that: according to Xinhuanet, China is planning to expand the size of its Shanghai experimental trade zone (FTZ) in Lingang, where Tesla is building its Gigafactory. The move creates a path for China to further relax its tariffs for the US automaker and help the flow of goods in and out of its Shanghai factory.
Tesla in China is becoming a classic case of what happens when a government’s priorities and a company’s interests converge. Forced to handle the growing pollution menace and fattening oil bills, China has grown tired of waiting for home-grown companies to take the lead in transforming its auto sector.
China has now decided to stoke competition in the domestic market by adding Tesla, a world leader in EV tech, into the mix.
And Tesla is more than happy to oblige.
“I really think China is the future,” declared Elon Musk after he recently visited Gigafactory 3 in Shanghai.
Author Bio: Shankar Narayanan is the editor of 1redDrop.com. Has an MBA from Kent State University and an engineering degree from Madurai Kamaraj University. He has been an active contributor to top financial sites like SeekingAlpha and GuruFocus, and has a penchant for talking business, finance, and technology.