Tesla’s China dream threatened by standoff over Shanghai factory

Hong Kong – Tesla, the
biggest-selling electric carmaker in the US, is in danger of being
relegated to an expensive niche in China because Elon Musk can’t clinch a
deal to open a factory there.

More than seven months after Tesla said it was working with
Shanghai’s government to explore assembling cars, an agreement hasn’t
been finalised because the two sides disagree on the ownership structure
for a proposed factory, according to people with direct knowledge of
the situation.

China’s central government says the plant must be a joint
venture with local partners, while Tesla wants to own the factory
completely, the people said, asking not to be identified because the
negotiations are confidential.

Currently, all foreign automakers must
partner with Chinese companies in order to manufacture locally. Tesla’s
sluggishness in starting local manufacturing means it’s fumbling a
chance to capitalise on China’s hard sell for new-energy vehicles,
including EVs, plug-in hybrids and fuel-cell vehicles.

President Xi
Jinping’s administration wants to scrub notorious air pollution and
reduce dependence on imported oil, and it’s doling out billions of
dollars in subsidies to entice consumers away from gas guzzlers.

“It’s a market they need to get a foothold in,” said Jeffrey Osborne,
a New York-based analyst for Cowen & Co with an underperform
recommendation on Tesla.

Tesla declined to comment on its negotiations with the Chinese
government over local production. The Ministry of Commerce, National
Development and Reform Commission, and the Shanghai Economy and
Information Commission – which are all involved in the
deliberations – didn’t reply to questions faxed at their requests.

The disagreement doesn’t mean a deal won’t be reached in the
future. Tesla currently sells cars in China, but an import tax of 25% catapults the sticker price beyond the means of most consumers. A
Tesla Model X made in the US and shipped to China costs about 835 000
yuan ($132 000), providing openings for cheaper models from domestic
rivals such as BAIC, Warren Buffett-backed BYD and
startups NIO and Byton.  

Tesla said in June it was working with the Shanghai government to
explore local manufacturing, and it expected to more clearly define
production plans by the end of 2017. The company said it needed to have
local factories “to ensure affordability for the markets they serve.”

In November, Musk said during an earnings call the company was about
three years away from starting production in China – meaning 2020 at the
earliest. “Don’t set your watch by this,” he said.  

Shares of local suppliers subsequently fell.

And the waiting game for Palo Alto, California-based Tesla may not
end soon. Speaking with analysts after earnings were announced February 7,
Musk, the chief executive officer, didn’t talk about China, and the
company didn’t mention its China plans in the update published with
those results.

“Tesla has no strategic path,” said Yale Zhang, managing director of
the Shanghai-based consulting company Automotive Foresight. “It has the
halo of Elon Musk, and its products are slightly ahead of the
competitors, but the others – especially the Chinese EV startups – are
catching up rapidly.”

In the US, Tesla accounted for the majority of
the 104 471 battery-powered cars, according to data compiled by
Bloomberg.In China, however, Tesla sold 14 883 vehicles, accounting for
just 3% of the nation’s battery-powered EV sales of 449 431

Tesla ranked 10th behind leader BAIC’s affiliate, Beijing
Electric Vehicle, which sold 102 341 cars, according to Bloomberg
Intelligence. BYD sold 33 020 for third place.Tesla said it currently
has 31 retail stores across China and more than 1 000 Superchargers,
which can recharge a model in 30 minutes.

Sales of new-energy vehicles – a category that
includes battery-powered, plug-in hybrid and fuel-cell
automobiles – reached 777 000 units last year and could surpass 1 million
this year, the China Association of Automobile Manufacturers estimated.
The government’s target is 7 million vehicles a year by 2025.

Buyers say the generous handouts are working. Lily Li, a 36-year-old
office worker from Shanghai, bought a BJEV car even though its driving
range falls short of Tesla vehicles. Li paid less than 100 000 yuan for
the EV160 model after incentives.

“I am very into Tesla for its battery technologies, but I can only
afford a Tesla if its price falls below 300 000 yuan,” Li said. “It will
take years before that happens, so I had to make do with a domestic

BYD’s top seller – the e5 – costs 129 900 yuan after subsidies from the
central government, according to its website. NIO and Byton also beat
Tesla on price. NIO’s ES8, with a range of 355 kilometres on
a single charge, sells for 448 000 yuan ($71 000).

Byton, a Nanjing-based company started by former BMW AG executives,
unveiled a planned $45 000 SUV at last month’s CES in Las Vegas.

“It’s going to be a much narrower lane for Tesla,” said Bill Russo,
CEO of Shanghai-based Automobility. “If you are double the price of
the competition, then you are always going to be struggling.”

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