- CEO Elon Musk has complained about a hefty import tax that Chinese
- But an additional 25% tariff could make the less expensive Tesla Model 3, now ramping production, a prohibitively costly purchase for its target Chinese customers.
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Tesla has a China problem — and it's about to get worse (TSLA, GM)
Tesla's biggest market is the US, but it still needs to play in China.
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Elon Musk is the only major auto CEO who has taken to Twitter to complain about China's trade policies. He engaged directly with President Trump last month, and in short order the administration leveled tariffs on Chinese products.
The Chinese fired back with their own tariffs, and by the looks of it, the 25% existing import tax on Tesla vehicles manufactured in California and exported to the gigantic and growing Chinese market will get hit with another 25%.
Thanks, Donald.
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Tesla's biggest market is still the US, but it still needs to play in China, for numerous reasons, not least of which is that thanks to government support of electric vehicles, Tesla stands to see much better growth in the Middle Kingdom's surging market than in the mature US market. (Tesla declined to comment on the China tariffs.)
The China market is already larger than the US market and could be more than twice as big in the coming decades: US sales have topped out at around 17 units annually, while China could someday see 40 million. The world's automakers have been attacking this opportunity for decades, setting up joint ventures with Chinese carmakers to build vehicles for the domestic market.
Tesla wants to play by its own rules in China — or make new ones
Tesla, predictably, doesn't want to do this and has been working to establish a stand-alone factory in Shanghai. Nobody saw a trade war coming two or three years ago, so we can't blame Tesla for acting in its own interest and trying to carve out an exception for itself.
But the hard fact of the matter is that General Motors has a happy, longstanding relationship with SAIC, dating back to 1997, along with a gaggle of other JVs in the country (GM has been selling cars in China forever, dating back to the early 20th century). This might strike some us a technology sapping compromise, dictated by the Chinese central government, but in practice, it means that GM obtains market access and doesn't have to maintain a 100% investment in Chinese manufacturing facilities.
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Some purist might not like it, but for decades, it has been a win-win as GM sales in China now surpass sales in the US.
Only about 250,000 vehicles are exported from the US to China each year, and as the tariff dust-up has revealed, many are US-made, German-branded SUVs from BMW and Mercedes that are manufactured in the non-union, GOP-dominated South.
Tesla, on balance, sends a lot of production to China: nearly 15% of its total of around 100,000 vehicles, according to the LA Times. That figure should rise dramatically as the less-expensive Model 3 ramps up production; the car was already slated to provide Chinese buyers with a cheaper alternative than the Model S and Model X, which with the old 25% tax were extremely pricey for Chinese buyers.
It looks bad for Tesla — and bad for Trump
So here's how the whole thing shakes down. Tesla is pretty much kneecapped in China, while the only other US-based automakers that take a hit are German transplants building vehicles with an American workforce in the Republican heartland. I haven't even gotten to latest new car factory to be built in the US — a $1.1-billion plant by China-owned Volvo, in GOP-friendly South Carolina.
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The major US automakers, located in the battleground Midwest that sent Trump to the White House, feel no pain because they export few vehicles to China. But that doesn't help Trump because roiling the existing trade relationship means that importing China-made vehicles to the US becomes dicier for the likes of GM. With US sales at peak levels, GM isn't likely to add new manufacturing capacity or hire additional workers, so all a trade war does is reduce choice for American consumers.
Tesla shares have surged in the past week, due largely to the carmaker's pledge that it won't need to raise fresh funding in 2018. But the markets could be underestimating the substantial risk that a Tesla sales collapse in China could invite. The only way this ends well for Musk is if Trump actually starts a full-on trade war with China — and wins!
But China is so committed to controlling its own auto industry that such an outcome seems improbable.
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