Tesla's logic and troubles in moving eastward: There are still three major problems to be solved in building a factory

The rumor was eventually debunked in the clarification.

The latest news shows that Tesla officially responded that Tesla is discussing with the Shanghai Municipal Government the possibility of establishing a car manufacturing plant locally, and Tesla will continue to evaluate potential factory sites.

This means that the facts are not as initially reported in the media a week ago.

On June 20, a media outlet quoted Bloomberg as saying that Tesla had reached an agreement with the Shanghai Municipal Government and that Tesla's first China factory would be located in the Shanghai Lingang Development Zone. As soon as the news came out, it immediately set off a social media post.

Two days later at noon, news about Tesla's factory construction in China escalated again. A picture of "Tesla's signing ceremony in Shanghai" went viral in WeChat Moments; soon after, news broke that Tesla would form a joint venture with Shanghai Electric Group Co., Ltd. (hereinafter referred to as Electric Group).

However, the plot took a dramatic turn in the evening.

That evening, Shanghai Lingang Holdings issued a clarification announcement, and the next day, Shanghai Electric Group followed suit and issued a clarification announcement, both denying any cooperation with Tesla.

At this point, the matter of "Tesla building a factory in China" has come to a temporary end with the cooperation partner and the location of the factory still undetermined.
"We expect the factory construction plan in China to be more clearly defined by the end of this year. The Chinese market is vital to Tesla." Tesla said in its response to the incident on June 23, "Although we expect most production to still be completed in the United States, we need to set up overseas factories to ensure that more local consumers can afford our products."

Factory construction is in turmoil

In fact, this is not the first time that there have been rumors that Tesla is building a factory in China.

Reporters found that since Tesla founder Elon Musk came to China in 2015, news about Tesla building a factory in China has continued to emerge; therefore, cities such as Shanghai and Guangdong have also been predicted as site selections.

In June last year, the market heard that "Shanghai Jinqiao Group Co., Ltd. (hereinafter referred to as Shanghai Jinqiao) has signed a non-binding memorandum with Tesla, and the two parties will cooperate to build production facilities in Shanghai"; but then Shanghai Jinqiao issued an announcement to clarify the matter, saying that the company had not signed a memorandum or other form of document with anyone to jointly build a factory with Tesla.

It is February this year.

That month, many media reported that Tesla would build a joint venture with China in Shanghai Lingang to produce 500,000 vehicles per year. But Tesla later responded that the rumor was not true. At the same time, Shanghai Lingang also issued a clarification announcement stating that Lingang Group has not signed a cooperation agreement with Tesla on its factory construction in China, nor has it participated in related investments.

Two months later, news broke that Tesla was planning to build a wholly-owned factory in Guangdong. However, the news was also denied by Tesla officials.

Up to this point, until the current Tesla Shanghai factory construction turmoil, Tesla has had at least four factory construction blunders in China in just half a year.

However, although the specific details of Tesla's factory construction in China have yet to be answered, industry insiders believe that Tesla's idea of ​​moving eastward to build a factory in China is an inevitable fact in the future.

"It is only a matter of time before Tesla builds a factory in China. Even if it is not domestically produced, it may be in the form of CKD or SKD, and build an assembly plant similar to the one Tesla has in the Netherlands." Auto commentator and founder of CarTek Liu Qi told reporters.

The so-called CKD (Completely Knock Down) refers to completely knocked down parts, which is a special term for imported complete vehicles in the form of completely knocked down parts. The parts produced locally are assembled into complete vehicles with lower tariffs and lower wages using local labor, and are sold at a lower retail price. SKD refers to the fact that in international trade, especially in international automobile trade, automobile companies in the exporting country of complete vehicles disassemble the finished products and export them in the form of semi-finished products or parts. The importing manufacturers then complete the finished vehicles by self-assembly in their own country and sell them.

Liu Qi believes that Tesla's decision to build a factory in China has many benefits for Tesla. "It is still necessary for Tesla to achieve true domestic production (local parts procurement rate of more than 70%), mainly from a policy perspective - subsidies, licenses, and new energy credits are all real benefits. The most important thing is that only true domestic production can reduce prices and further lower the purchase threshold."

Cui Dongshu, secretary-general of the National Passenger Car Information Conference, also told reporters that if Tesla can build a factory in China in the future, it will save 25% of tariffs.

This is indeed the case. Take Tesla's cheapest MODEL S in the Chinese market as an example. At present, the market guide price of MODEL S is 723,500 yuan to 1,399,800 yuan. Based on China's comprehensive tax rate for imported cars (including tariffs, value-added tax, etc.) of 46.25%, Tesla's CIF (cost, insurance and freight) price is about 494,700 yuan to 957,100 yuan; but assuming that Tesla can build a factory in China in the future, minus the 25% tariff, the price of Tesla MODEL S will be about 599,800 yuan to 1,160,400 yuan.

In fact, Tesla's sales performance in China is very good. Tesla's financial report shows that Tesla's sales in China exceeded 1 billion US dollars in 2016, more than three times that of the previous year. In the view of industry insiders, building a factory in China will also have important market strategic significance.

Tesla's troubles

However, many industry insiders interviewed by reporters said that although building a factory in China is a necessity, Tesla's choice is not easy, which has also become its "trouble."

"No matter what, why hasn't Tesla finalized the deal yet? This has to do with Tesla's corporate character. It is not a company that likes to compromise, so it is not easy to adapt to China's joint venture policy," said Liu Qi.

According to relevant Chinese policies, foreign companies such as Tesla that invest in and build factories in China need to cooperate with at least one Chinese partner to operate, and the foreign shareholding ratio cannot exceed 50%.

In Liu Qi's view, there are three problems that hinder Tesla from building a factory. "First, it does not want to form a joint venture with a state-owned enterprise; second, it is not satisfied with the preferential conditions of the local government; and third, it is short of funds and cannot afford to build a second factory in the world. These three problems are actually very real, not speculation."

"It is difficult in itself to get Tesla to accept a joint venture with a state-owned enterprise and then form a brand bundle with a local brand (such as SAIC Volkswagen, Dongfeng Honda, and Beijing Benz)." Liu Qi gave an example of how incompatible this company is with China's national conditions. This can be seen from the fact that three years ago, Tesla held a promotional event on Tmall's Double Eleven, which was then urgently stopped by the US headquarters.

"Imagine that a new electric car brand that challenges the rules of the traditional automobile industry forms a joint venture with a Chinese state-owned enterprise. This is not only a question of what to put on Tesla's tail badge, but also a series of issues that challenge Tesla's principles and bottom line," said Liu Qi. "By cooperating with a state-owned enterprise, Tesla will lose its right to act arbitrarily in the four links of R&D, production, sales and after-sales, and its personality will be compromised. This may be unacceptable to Elon Musk."

In fact, in addition to the headache of choosing a suitable Chinese partner, obtaining policy benefits is also something that is enough to worry Tesla.

For example, according to relevant policy regulations, using batteries produced in China is a necessary condition for applying for new energy qualifications.

"Tesla's car bodies can be made in China, there is no problem with that. The car glass, sealing strips, seats, sound insulation materials, etc. can all be purchased domestically." Liu Qi introduced, "However, the most critical battery pack can only be produced in the SKD method. Because the battery pack cells are only produced in Tesla's Nevada Super Factory. In other words, this factory is 'a source of water for the world', and Tesla cannot purchase local Chinese battery types."

This means that if Tesla continues to use batteries produced by the super battery factory when building a factory in China, it will not be able to obtain new energy qualifications, let alone policy subsidies.

However, Tesla seems to have come up with a solution. Tesla's battery technology has long been in cooperation with Panasonic. The reporter noted that in April this year, Panasonic announced that it would build a joint battery factory in Suzhou to produce 18650 batteries. This battery is the one previously used for Tesla Model S and Model X.

It may trigger a "catfish effect" with more benefits than disadvantages

"Having said that, I think Tesla still has a future in joint ventures with car companies. The interests are shared and it can solve many of Tesla's worries," Liu Qi said. "But the question is: do these companies like SAIC, GAC, and BAIC really think highly of Tesla?"

Industry insiders told reporters that Tesla is not the only one worried. Domestic new energy brands may not necessarily welcome Tesla's arrival.

Public data shows that as the country firmly regards new energy vehicles as a strategic emerging industry and provides a series of industry guidance policies, China's new energy (9.600, -0.04, -0.41%) vehicle production and sales have ranked first in the world for two consecutive years, with a total of more than 1 million vehicles promoted, accounting for more than 50% of the global market share.

However, in the view of industry insiders, from the perspective of the entire industry, China's new energy vehicle industry is currently still mainly dependent on policy-driven. To change the current situation where the new energy industry is heavily dependent on subsidies and accelerate market-oriented transformation, it is necessary to fully tap the innovative vitality of enterprises.

Industry insiders said that the arrival of Tesla will stimulate and even challenge domestic new energy vehicles. "Objectively speaking, compared with Tesla and multinational auto companies, Chinese brands still face many shortcomings in terms of overall competitiveness in terms of vehicle design, brand competitiveness, supply chain and quality system management, and marketing promotion."

However, there are different opinions in the industry.

"Tesla's factory in China will definitely have an impact on domestic new energy vehicles. But I think the advantages outweigh the disadvantages. Tesla will definitely play a driving role in the development of China's new energy vehicles." In Liu Qi's view, Tesla's factory in China will have a "catfish effect."

"Tesla's factory building in China is in line with Tesla's global strategic needs, and will also have a certain positive effect on the development of China's electric vehicle industry." Li Xin, general manager of Nanjing Pusdir Technology Co., Ltd., which is engaged in the research and development and production of connection systems for the electric vehicle industry and electric vehicle charging (replacement) industry, told reporters.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.