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When could Tesla begin making electric cars in China?

A Tesla Model S. Photo: Tesla China

Tesla Motors still faces a few barriers in localizing production in China, even though the country's commerce ministry confirmed media reports that the American firm was in talks with the Shanghai municipal government about the feasibility of building a manufacturing facility in the city's free trade zone.

Speaking at an earnings conference call last week, Elon Musk, chief executive officer of Tesla, pushed back the date of producing electric cars in China to the next decade, saying that the company will not start making major capital expenditures in the country until 2019.

Bigger losses, lack of production capacity

Musk's statement perceptibly indicates that some problems still need to be solved before Tesla is allowed to make electric cars in China. Although Tesla is well recognized as an advanced maker of battery-powered cars, it is now plagued with bigger losses and insufficient production capacity.

Tesla's latest China plan came after the release of worse-than-expected financial results, which showed that the company almost doubled its losses in the three months ending September 30 to $619 million, a record quarterly loss for the electric car manufacturer.

The third-quarter financial report also shed light on Tesla's inability to produce more cars as promised. According to the report, Tesla shipped 25,915 Model S and Model X cars and only 222 Model 3 sedans in the quarter.

Media reports said that Tesla's shipment is less than 1 percent of some traditional carmakers such as General Motors and Volkswagen. In China alone, Tesla sold about 11,000 cars last year, largely trailing General Motors which delivered 3.87 million cars in the country.

Worse still, Musk also revised his original plan to produce 5,000 Model 3 sedans per week by the end of 2017, saying that the goal is likely to be reached by the end of the first quarter of 2018.

The low-priced Model 3, which is nearly half the cost of Tesla's previous premium models, is widely seen as a trump card that the company could use to grasp more share of China's competitive electric car market.

Hence, the production delay of the Model 3 casts doubts on Tesla's plan to transform into a mainstream car producer from a niche luxury carmaker.

Analysts say that if a Chinese plant is unable to produce more affordable cars it would make no sense for Tesla, which garnered $1.1 billion in revenue in 2016, accounting for 15 percent of its total revenue of $7 billion.

Debate on sole ownership

Tesla's attempt to break the tradition that foreign carmakers must cooperate with a local partner if they want to build a factory in China also poses a barrier to its localization plan.

The Palo Alto, California-based company is planning to establish a wholly owned manufacturing facility in Shanghai's free trade zone, a move that can prevent its advanced technologies and profits from being shared by local partners.

At a regular press conference last week, a spokesperson of China's Ministry of Commerce refused to give further details about whether Tesla would be allowed by the government to establish a plant independently in Shanghai, hinting that the two sides still have differences on the plant's ownership.

Economically, although a local factory can help reduce the cost of production and transportation to some degree, a sole ownership still goes against Tesla's original intention of making its cars affordable in China, because it cannot be exempt from a high 25 percent import tariff if it refuses to set up a local plant in partnership with a local car production company.

So far, most of the famous global carmakers doing business in China including General Motors, Volkswagen and the Renault-Nissan Alliance have announced plans to establish joint ventures with local players to make electric cars.

"If Tesla establishes a wholly owned plant in Shanghai's free trade zone, the money it can save from the move is basically $3,600 for shipping," said Yin Chen, secretary-general of the China (Shanghai) Free Trade Zone Comprehensive Research Center at Fudan University, according to a Caijing report.

But Yin believed that it is very possible that Shanghai's free trade zone will further open the electric car industry to foreign investors.

During the 19th National Congress of the Communist Party of China held in October, Chinese President Xi Jinping pledged that foreign investors would be given wider market access and their legitimate rights and interests would be protected under a policy that aims further openness.

In September, the Ministry of Commerce revealed that China was studying the policy to relax investment restrictions on foreign new energy car producers, in response to previous reports that the country's policymakers were thinking of allowing foreign carmakers to set up wholly owned electric car businesses in free trade zones as early as next year.

If the policy takes effect, it would be a milestone breakaway from the 50-50 ownership rule for China-foreign joint ventures, which was introduced in 1994 in the hope of enabling China's then-fledgling automobile industry to share foreign advanced technologies by jointly operating factories with global carmakers.


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