By Trefor Moss and Tim Higgins
SHANGHAI -- Tesla Inc. will build a factory in Shanghai, the
city government announced Tuesday, a move expected to boost sales
in the world's largest auto market but comes amid a broader trade
dispute between the U.S. and China.
The electric-car maker will set up and wholly own the plant that
is expected to produce 500,000 vehicles a year sometime next
decade, 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, the authorities said.
Tesla is doing something that no foreign auto maker has done
before: build a factory and a network of suppliers in China without
the support of a local joint venture partner. The larger trade
dispute also poses a risk to Tesla if the issues should create
consumer backlash against American products.
Even so, China offers 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.
"They'll be able to control the process far more tightly than a
[joint] operation.," Mr. Chao said. "It frees them to build this
the way they want to."
Mr. Musk has been under intense pressure for the past year to
ramp up production of the Model 3, the company's bet that it can
broaden its appeal to more mainstream buyers with a compact sedan
that is supposed to start at $35,000.
He reached an often missed goal of producing 5,000 Model 3
sedans in a single week during the final seven days of the second
quarter, a threshold that if continued throughout the third quarter
should make the auto maker cash flow positive and profitable.
Analysts have said Tesla will need to raised additional money in
the future, especially to pay for Mr. Musk's ambitious growth in
China.
China is already Tesla's second-biggest market after the U.S.,
selling about 17,000 cars there 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 grow in China, where
sales of electric vehicles are rising quickly, boosted by
government policy. Chinese customers are projected to buy 3.5
million electric passenger cars in 2022, IHS Markit forecasts, up
from 580,000 last year.
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
have forced all traditional foreign makers, including Ford Motor
Co. and General Motors Co., to manufacture cars with Chinese
partners to avoid paying steep import tariffs.
Electronic vehicle makers are the first to benefit from the new
government policy, paving the way for Tesla to move ahead this
year. Foreign-investment restrictions on commercial vehicle makers
will be lifted by 2020, and on all remaining auto makers by 2022.
It remains to be seen whether auto makers with longstanding
partnerships in China will attempt to emulate Tesla, given the
complexity of dissolving joint ventures that have existed in some
cases for more than two decades.
A Tesla spokesman said it would take about two years until the
factory begins producing vehicles, and another two to three years
before the facility is hitting its annual capacity of 500,000
vehicles. "Today's announcement will not impact our U.S.
manufacturing operations, which continue to grow," the spokesman
said in a statement.
That is an aggressive timeline that sets up 2020 to be a major
year for Tesla. Mr. Musk has already said he plans that year to
begin production of the Model Y, a new compact sport-utility
vehicle, as well as the new Roadster sports car and Semi, a
tractor-trailer truck.
Tesla does have at least one local ally, with internet giant
Tencent Holdings Ltd. having spent $1.7 billion on a 5% stake in
the electronic-vehicle 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.
Over the weekend, Tesla's Chinese website increased by nearly
20% the price listings. A basic Model S sedan now costs about
$128,400 from $107,300. Tesla employs about 1,500 people in
China.
Total world-wide, the auto maker has about 40,000 employees with
one assembly plant outside of San Francisco in Fremont, Calif.,
that aims to make 100,000 Model S sedan and Model X sport-utility
vehicles this year plus as many Model 3s as it can. Tesla makes
batteries at a factory outside of Reno, Nev.
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%, until Mr. Trump's
decision to place tariffs on Chinese goods, inducing Beijing to
increase its own tariff on U.S. cars on July 6.
--Chunying Zhang contributed to this article.
Write to Trefor Moss at Trefor.Moss@wsj.com and Tim Higgins at
Tim.Higgins@WSJ.com
(END) Dow Jones Newswires
July 10, 2018 14:03 ET (18:03 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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