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Tesla's push to open China plant takes a hit amid ownership structure debate

People look at a Model S sedan displayed in the Tesla showroom at Parkview Green Shopping Mall in Beijing, China. Photo: Visual China Group

Tesla's endeavor to build a manufacturing facility in the Chinese city of Shanghai has hit a rough patch due to a slow progress in finalizing a deal with the local government.

The delay in opening a plant in the country, which the US premium electric car maker will rely on to cut production cost to make cars more affordable, is caused by the Chinese government's disagreement over the ownership structure of the proposed factory, Bloomberg reported, citing unnamed sources familiar with the situation.

Tesla wants its proposed factory in Shanghai's free trade zone to be self-owned as an exception to China's industry rules, which require that foreign automakers must establish joint venture companies with local partners before making cars in the Chinese territory, according to the sources.

So far, many prestigious international automakers including General Motors, Ford Motor, Volkswagen and the Renault-Nissan Alliance have clinched deals with local players to jointly manufacture electric cars in China, as the country encourages the production and sales of quality electric vehicles with a newly released subsidy policy which is in favor of technology-powered electric cars with longer driving ranges.

Holding a full ownership in the planned China plant means Tesla could prevent its cutting-edge technologies from being shared with local partners, and grants the company the right to pocket all the benefits earned in the Chinese market, where most foreign-branded vehicles especially the premium ones are customarily sold with higher prices than in the Western world such as the United States and Europe.

But the Palo Alto, California-based Tesla could not have the best of both worlds because without a joint venture with local players it will have to continue to pay the hefty 25 percent import tariff, a key factor pushing Tesla cars' price tags even higher. In China, Tesla cars are known for their fancy exteriors, state-of-the-art technologies and longer driving range, with the sticker price of the most basic Model S sedan in the country standing at more than $100,000, compared with less than $70,000 in the United States.

This dilemma reflected in a statement during an earnings conference call last November, in which Tesla Chief Executive Officer Elon Musk pushed back the date of producing electric cars in China to the next decade and said that the company would not start making major capital expenditures in the country until 2019.

Experts say the divergence on the ownership structure for the proposed factory did not forebode an agreement would not be signed in the future because there is an incredibly big share of China's electric car market waiting for Tesla to capture.

According to data compiled by Bloomberg, Tesla merely holds 3 percent of China's battery-powered car market, largely lagging behind its sales in the home base, where it enjoys the lion's share.

The China Association of Automobile Manufacturers predicted that the sales of new energy cars in China would hit the 1 million mark this year, up from last year's 777,000 units. The Chinese government has set an aggressive target of selling 7 million electric cars a year by 2025 as part of efforts to combat air pollution.

In addition, China's rigid auto policy might be eased in the future, with some experts saying that it was very possible that Shanghai's free trade zone would further open the electric car sector to foreign investors.

In September last year, China's Ministry of Commerce revealed that the country was studying the policy to relax investment restrictions on foreign new energy car manufacturers as a blurred evidence to the previous speculation that policymakers were considering allowing foreign carmakers to set up wholly owned electric car businesses in free trade zones in 2018.

Regardless of the existing barriers in reaching a deal to establish a China plant, Tesla has gone out of its way to improve the marketing, sales and charging networks across China. The company said that it currently has 31 retail stores and more than 1,000 Superchargers across the country.

Last year, it started the operation of what it called the "world's largest Tesla supercharging station" in Shanghai, which is capable of charging 50 cars simultaneously. Such supercharging station will also be introduced to Beijing, according to the company, which was reported to install an additional 1,000 Superchargers in China in 2018.

Tesla was also reportedly mulling a partnership with its unique lithium-ion battery technology provider Panasonic to build a super battery production facility in China, whose production capacity would be basically equal to the $5 billion Gigafactory battery plant in Nevada, the United States. The Nevada-based battery factory will produce 35 gigawatt-hours a year of lithium-ion battery cells by 2018, almost as much as the rest of the world's battery production combined.

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