By Trefor Moss
SHANGHAI -- Tesla Inc. will build a factory in Shanghai, the
city government announced on Tuesday, a move expected to boost
sales in the world's largest auto market but one that could also
draw fire as U.S. manufacturers face political pressure to keep
jobs at home.
The electric-car maker will set up a plant with an annual
capacity of 500,000 vehicles, the Shanghai authorities said in a
statement. Tesla Chief Executive Elon Musk was in Shanghai to sign
a memorandum of cooperation with Mayor Ying Yong, it said,
confirming that the facility will be wholly owned by Tesla.
"We are delighted to have a strategic partnership with Tesla,
and we welcome the development, manufacture and sale of pure
electric vehicles in Shanghai," the Shanghai government statement
said. Telsa didn't immediately respond to requests for comment. The
Shanghai authorities released pictures of Mr. Musk and the mayor
signing the deal.
Tesla is doing something that no foreign auto maker has
attempted before: Build a factory and a network of suppliers in
China without the support of a local joint venture partner to help
navigate China's bureaucratic labyrinth.
The announcement also comes as the U.S. and China lock horns in
a trade dispute, posing some risk to Tesla if the issues should
create long-term consumer backlash against American products.
Even so, China also offers unmatched opportunities for growth --
especially with electric vehicles -- and building its own plant
allows Tesla to keep all the revenue it generates, instead of
having to share it with a Chinese partner, said James Chao,
Asia-Pacific automotive director at IHS Markit.
"To produce in the market where you want to grow, that's still
got to be their long-term plan," Mr. Chao said. "The pros clearly
outweigh the cons. They'll be able to control the process far more
tightly than a JV operation. It frees them to build this the way
they want to."
China is already Tesla's second-biggest market after the U.S.,
selling about 17,000 cars here last year, compared with roughly
50,000 in the U.S., and 103,000 globally.
But those volumes are relatively small, and building locally,
rather than importing, would enable Tesla to realize its full
potential in China, where sales of electric vehicles are growing
fast, boosted by government policy.
The Wall Street Journal reported last October that Tesla had
reached an agreement with the Shanghai authorities to build a
wholly owned plant in the city, but formal confirmation of the deal
was slow to come amid regulatory uncertainty.
Beijing finally confirmed plans in April to phase out rules that
effectively forced foreign makers to manufacture cars with Chinese
partners to avoid paying steep import tariffs. EV makers are the
first to benefit from the new policy, paving the way for Tesla to
move ahead.
Tesla does already have at least one local ally, with internet
giant Tencent Holdings Ltd. having spent $1.7 billion on a 5% stake
in the EV maker last year, and raising local capital to help build
the Shanghai plant shouldn't be a problem.
"If there were an opportunity for Chinese investors to go into
Tesla, they'd do it in a heartbeat," Mr. Chao said.
Imported Teslas just got more expensive in China after Beijing
slapped a 40% tariff on cars imported from the U.S. last week in
retaliation for new tariffs imposed by Washington. That problem
won't be resolved any time soon: It will take three years for
locally produced Teslas to start rolling off the Shanghai
production line, auto analysts say.
"Tesla may benefit from China's relaxation of auto industry
investment regulations, but plenty of other industry sectors remain
restricted, particularly services," said Kenneth Jarrett, president
of the American Chamber of Commerce in Shanghai. While Tesla may
view China as "an indispensable market," other U.S. companies might
invest elsewhere "if China doesn't open up its market to fair
competition," he said.
President Donald Trump has put pressure on American
manufacturers to invest in domestic production rather than build
plants in places like China or Mexico. Last month, Mr. Trump
publicly berated motorcycle company Harley-Davidson Inc. over plans
to shift some production from Kansas to Thailand. Tesla, though,
has no plans to move any production out of the U.S.
Mr. Musk appealed directly to Mr. Trump via Twitter back in
March for help persuading China to reduce its then-25% tariff on
auto imports, which he described as a handicap akin to "competing
in an Olympic race wearing lead shoes." China then granted Mr.
Musk's wish, lowering its tariff on autos to 15%, only for Mr.
Trump's decision to place tariffs on Chinese goods inducing Beijing
to hike its own tariff on U.S. cars on July 6.
Tesla still has its ace card: Exceptional brand cachet in the
China market, boosted by Mr. Musk's own celebrity.
"He's my hero," said Huang Xianchang, the manager of a Tesla
store in Shanghai. Nine out of 10 customers buy a Telsa because
they're inspired by Mr. Musk's reputation as an innovator, Mr.
Huang said, adding that Tesla has no real competition in the luxury
EV segment.
That will have changed by the time locally built Teslas are on
sale by 2022, but analysts say the growth of the market more than
justifies Tesla's bet on China. Chinese customers will buy 3.5
million electric passenger cars in 2022, IHS Markit forecasts, up
from 580,000 last year.
Chen Shengyi, who works for a trading company in Shanghai,
bought a Tesla Model S last year, having previously driven an Alfa
Romeo. Ms. Cheng said she would never swap her imported Tesla for
an EV built in China -- including a locally assembled Tesla.
"I've heard that when a foreign brand is localized, its quality
deteriorates," she said.
Mr. Huang said that locally built Teslas -- most likely the
Model 3 -- would be targeted at mass-market customers, while
high-end imports would still be available to more affluent
buyers.
--Chunying Zhang contributed to this article.
Write to Trefor Moss at Trefor.Moss@wsj.com
(END) Dow Jones Newswires
July 10, 2018 10:08 ET (14:08 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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