Photo: John Cummings. Source: Wikimedia
Tesla says that it plans to set up its first non-US factory in Shanghai. It’s a logical next step for the electric vehicle maker. China is the number one electric car market in the world, with almost half a million in vehicle sales – more than twice the level in the US. Next year, Beijing will require that every automaker that sells gasoline-powered cars in China also offer electric vehicles, or else purchase credits from companies that do.
By setting up a factory in China, Tesla can avoid the some of the risks of tariffs and trade barriers that are currently roiling global markets. And while the Model 3 is the top-selling plug-in electric passenger car, they still sold less than 15 thousand cars in China last year. They have a tiny market share, for all their aspirational qualities and high-tech reputation. Tesla may style itself as a software platform, but they need to produce a lot more platforms. Their margins are still too thin. Even though sales are growing, losses are growing, too.
Source: SEC Filings, Wikipedia
With numbers like these, it’s no wonder that Elon Musk wants to move production to a location with lower costs and a growing market. But the decision is risky. While Beijing announced in April that they would no longer require foreign automakers to work through local partners, the risk to Tesla’s intellectual property is real. The top-selling electric car in China is the Denza, a joint venture between Daimler and Chinese manufacturer BYD. Tesla’s technology is pretty advanced, and software can be easy to pirate.
Elon Musk announced that he hopes his Shanghai factory will eventually produce over 500,000 vehicles per year. That’s an ambitious goal: it would make Tesla one of the largest automakers in the world. So far, they’ve struggled with too much automation, battery issues, and a lack of space in their main Fremont, California facility. Tesla even set up a new production line inside a tent to meet last month’s 5000 car-per-week Model 3 goal. Many analysts don’t see that this is sustainable, although Musk now says he expects to produce 6000 cars-per-week by late August.
There are a lot of Tesla skeptics. Almost 30% of Tesla’s shares have been sold short. Those investors will only make money if the share price goes down. It’s clear that Musk believes his own PR. He’s put his financial future on the line. What’s murky, though, is whether Musk’s vision can be realized. It’s the function of a visionary to see things that have never been and ask, “Why not?”
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”