Tesla said close to plan for China production

Bloomberg News

Elon Musk has the kind of problem his fellow executives in Silicon Valley and Detroit would love to have: Demand for Tesla Inc.’s electric cars is booming in China and its California factory is “bursting at the seams.”

Now, he may have the kind of solution that stokes their envy, too. Tesla is close to an agreement with the city of Shanghai to make vehicles in China for the first time, according to people familiar with the matter. The deal would further open the world’s largest car market just as the government pushes to put more new-energy vehicles on the roads.

The agreement allowing Tesla to build facilities in the city’s Lingang development zone could come as soon as this week, said the people, who asked not to be identified because the negotiations are private. Details are being finalized, and the timing of the announcement could change. Tesla would need to set up a joint venture with at least one local partner under existing rules, and it isn’t immediately clear who that would be.

“Tesla sees an opportunity to create and lead a premium electric segment in China,” Michael Dunne, president of consulting firm Dunne Automotive Ltd. in Hong Kong, said in an email. “Affluent and brand-driven Shanghai as a production base makes sense.”

Representatives for Tesla at the company’s headquarters in Palo Alto, California, didn’t respond to requests for comment. A spokesman for Lingang didn’t answer calls to his mobile phone.

Reaching a deal to produce cars in China would help Tesla better compete with local rivals because it would eliminate a 25 percent import tariff that makes Tesla’s Model S sedans and Model X sport utility vehicles more costly than in U.S. showrooms.

China has identified new-energy vehicles as a strategic emerging industry and aims to boost annual sales of plug-in hybrids and fully electric cars 10-fold in the next decade. A total of 283,000 EVs were sold there last year, making up 41 percent of global sales, according to Bloomberg New Energy Finance.

About 15 percent of Tesla’s $7 billion in revenue last year was generated in China, according to data compiled by Bloomberg.

“The EV industry in China is studying Tesla and taking inspiration from it,” said Fu Yuwu, president of the government-backed Society of Automotive Engineers of China. “It inspired a batch of Chinese startups who studied Tesla before they started their own business.”

About 200 companies have announced plans to make new-energy vehicles in China, with backers including billionaires Jack Ma, Pony Ma, Terry Gou and Li Ka-shing. Domestic brands such as BAIC Motor Corp. and Warren Buffett-backed BYD Co. dominate the EV market with a combined 89 percent of sales, according to Bloomberg Intelligence.

Musk has been putting the pieces in place to compete. In March, he landed China’s second-most valuable internet company, Tencent Holdings Ltd., as an investor, with the owner of China’s ubiquitous messaging app WeChat agreeing to spend $1.8 billion for 5 percent of Tesla.

“An automobile is becoming a smart device,” Tencent President Martin Lau said during a May 17 earnings call. “We want to partner with the leading company in such fields.”

Shenzhen-based Tencent didn’t respond to a request for comment Tuesday. The company’s Hong Kong-traded shares hit a record high, boosting its gains to 48 percent this year.

A month after sealing the Tencent deal, Musk went to Beijing to meet with Vice Premier Wang Yang, according to the state-run Xinhua News Agency.

New models also will help Tesla compete in China, where unit sales of SUVs last year accounted for 37 percent of the passenger-vehicle market, according to data compiled by Bloomberg Intelligence. Tesla plans to introduce the Model Y, a compact SUV, in 2019 at the earliest.

Tesla made about 80,000 cars last year and aims to boost that to 500,000 annually by next year.

“By localizing production in China, it will set a benchmark for Chinese automakers and motivate them to make bigger technological innovation,” said Cui Dongshu, secretary general of the China Passenger Car Association.

A lot will depend on the manufacturing partner Tesla chooses. China requires overseas carmakers such as General Motors Co., Toyota Motor Corp. and Volkswagen AG to form joint ventures with locals in order to sell their brands there.

The rule enacted two decades ago capped foreign investment at 50 percent, helping local brands develop manufacturing expertise while still profiting from sales of foreign marques. GM’s Cadillac opened a $1.2 billion plant in Shanghai last year.

“Tesla has Elon Musk, who is the Steve Jobs of EVs,” said Wang Yunshi, director of the China Center for Energy and Transportation at the University of California, Davis. “Chinese officials get inspired by Musk. He’s a software guy who can come up with such capable cars, while so many engineers from our carmakers still cannot make something that decent.”