Tesla CEO Elon Musk's massive bid in China may be thwarted by local rivals



April 18, 2019 02:55:36

Even according to Elon Musk's standards, his Shanghai plan is ambitious: to occupy 86 hectares of muddy land on the outskirts of the city peninsula and begin to deploy the Tesla Model 3 made in China within a year.

Key points:

  • China is the world leader in the production and sale of electric vehicles
  • Tesla CEO Elon Musk wants to produce cheaper electric cars in Shanghai for Chinese drivers
  • It will face competition from more than a dozen Chinese electric assemblers already on the market

Few industry experts believe that this period of time, from turning the first lawn to delivering the first car, is realistic, but there are few entrepreneurs like Elon Musk.

"China does not have a man like Musk," said Jia Xinguang, a veteran Beijing analyst.

"It's quite surprising how quickly your business is developing here," he said.

Elon Musk is not saying exactly how much he is raising to build the Gigafactory in Shanghai, but some analysts have put the total investment at $ 2.7 billion – many of which come from Chinese state-owned banks.

Having just announced the deal in the middle of last year, he traveled on a bleak and rainy day in January to visit the sodden fields with the mayor of Shanghai, planting the Tesla flag and declaring that his factory would enhance the city's beauty.

"This is perhaps one of the most advanced factories in the world, perhaps the most advanced," he said at the opening ceremony.

"It's very impressive to see Shanghai's capabilities in building things, so we believe that with the resources here, we can build the Gigafactory in Shanghai in record time," said Musk.

He said the Shanghai factory will only produce the Tesla 3 and Y models – the smallest and most affordable sedan in which the company is betting its future.

The more Tesla does, the less it costs each and more Musk sells.

"Some believe that the cost of producing a Model 3 in China is only half of what it is in the US So if the base model currently costs more than $ 35,000 in the US, maybe Tesla could reach $ 20,000 in China in the future". "Mr. Xinguang said.

"This would definitely have a huge impact on China's new energy vehicle market," he said.

Tesla invests in China's electric car boom

Mr. Musk's bet on China is obvious.

More than half of the world's electric and hybrid vehicles are sold in China, and annual sales are growing rapidly, despite the slowdown in gasoline cars.

Electric vehicles (EVs) today account for about 5 percent of China's mass market, and the government wants them to account for one in five new cars sold by 2025.

Some of the more optimistic analysts believe China is on track to more than double that target, although a planned suspension of government subsidies is likely to slow growth.

"Chinese buyers are quite price sensitive, so reducing subsidies will almost certainly have an effect," said Cui Dongshu, secretary general of the China Automobile Passenger Association.

China's electric ambitions were on full display this week, with about two dozen Chinese automakers exhibiting electric sedans, SUVs and concept cars at the Shanghai Auto Show.

The government is now finding other ways to leverage what it calls "New Energy Vehicles" (NEVs), including an innovative "limit and negotiate" scheme that punishes Chinese car manufacturers that do not make EVs.

While China is lagging behind in some Scandinavian countries for the proportion of VEs on the roads, policies and the scale of the market have made it the center of a fierce dispute between manufacturers to dominate the future of the global industry.

"I do not think it's risky for Elon Musk to make such a huge investment in China," Cui said.

"In Shanghai, the technology is advanced, the cost of labor is not very high and I think Tesla will coexist harmoniously with domestic competitors."

This helps Tesla and Elon Musk to be revered in China.

During a visit last year, a middle-aged egg pancake seller became famous after Mr. Musk bought one of his snacks and devoured it by the side of the road.

On a later visit, his traditional hot dinner in Beijing was captured by a fan and circulated again on the Chinese internet.

Tesla enthusiasts regularly drive to the construction site outside of Shanghai and display drones, posting videos online that document the pace of progress.

Chinese Prime Minister Li Keqiang would still have offered Musk's permanent residence when they first met in January.

Chinese automakers ready to face Tesla

China is not just a land of opportunity for Mr. Musk.

It is also the place where Tesla is most likely to find his game.

China has more than a dozen companies producing hybrid or fully electric vehicles – from state giants to large private companies and start-up small businesses.

And it is privately owned BYD which, arguably, poses the greatest competitive threat.

The Shenzhen-based company came close to matching Tesla's 245,000 deliveries last year with the large number of cars sold in China.

Another automaker, BAIC – owned by the Beijing government – produced the best-selling model in the country: the compact EC-Series, which sells for $ 35,000 before subsidies.

"The main reason I bought one is because a government subsidy has halved the price and it is easier to get registrations for electric cars," said Kelvin Fung, a Beijing resident who bought a BAIC in February.

He said a policy that allows owners of electric cars to drive seven days a week instead of being subjected to a six-day jam restriction on gasoline cars is another incentive.

"I personally think Chinese cars are not as good as foreign brands, but they are very cheap," he said.

Reports of quality problems and dubious claims have further strengthened the view that, despite the enthusiasm of the government and domestic automakers, China is yet to produce a real rival for Tesla.

"Elon Musk can design special products that capture the hearts of people, in contrast, electric cars designed in China are boring," said Jia Xinguang.

"Chinese electric cars are not so fun," he said.



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