[Like much of the stock market, Tesla shares were up Monday on reports of a trade truce between President Trump and Chinese President Xi Jinping. The stock surged 5% early in the day, though it settled back down to finish up $8.01, or 2.3%, to $358.49.]
By
Russ Mitchell
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Tesla Model 3 at the Beijing auto show in April. (Roman Pilipay /
EPA/Shutterstock)
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China is crucial to Tesla’s future. So it’s
not surprising that the trade war is hitting the company hard.
China is Tesla’s largest market outside the
U.S., accounting for about 10% of total revenue in the first three quarters of
2018 — and the Model 3 isn’t even available there yet.
The company sold about 15,000 of its more
expensive Model S and Model X models in China last year, according to estimates
from research firm LMC Automotive.
Since the country raised the tariff on U.S.
car imports to 40% in July from the 15% it charges on non-U.S. auto imports, in
retaliation for the Trump administration’s tariffs on Chinese goods, Tesla’s
China revenue has plummeted — 27.5% in this year’s third quarter compared with
the same period last year, according to company reports.
The China Passenger Car Assn. told Reuters
recently that sales plummeted further in October. Tesla said last month it was
reducing Model S and X prices 12% to 26% under tariff pressure.
Like much of the stock market, Tesla shares
were up Monday on reports of a trade truce between President Trump and Chinese
President Xi Jinping. The stock surged 5% early in the day, though it settled
back down to finish up $8.01, or 2.3%, to $358.49.
Tesla last month began taking reservations in
China for its more affordable Model 3 sedan, which is expected to start
shipping “early next year,” Chief Executive Elon Musk said. Considering its
relatively low price — starting at $46,000 in the U.S. compared with $78,000
for a Model S (with options that can push the price well over $100,000) — a 40%
tariff on the Model 3 could devastate sales in China.
But if Tesla follows through with its plan to
build a big factory in China, tariffs won’t matter as much. The plant, to be
near Shanghai, would manufacture Model 3s and a new Model Y crossover. Building
the cars in China could reduce prices by a third, even without taking the
tariffs into account, Musk has said.
“It’s really the only way to make the cars
affordable in China,” he told analysts last year.
But right now the project is little more than
an empty expanse of land in Shanghai, which Tesla procured by signing a
long-term lease in October. The project awaits a government license, and no
financing has been announced. Musk has said Tesla will rely on loans from
Chinese banks.
The project had been set to begin producing
cars by 2020, but Musk told analysts in October the plant would be “active”
sometime in 2019. Analysts did not ask what “active” meant.
Musk alluded to “low capital costs” in the
plant’s early stages, relying more on manual labor than on advanced technology,
akin to the assembly line the company built in a parking lot under a tent in
Fremont, Calif., this year.
If the deal goes through, it would be the
first time China has allowed a foreign company to manufacture cars on its own
there. To date, a joint venture with a Chinese company has been required.
General Motors, Ford, Volkswagen, Toyota, Honda and other major automakers
operate in China on that basis.
The Trump administration has raised
complaints about China forcing companies to give up proprietary technology for
access to the China market. A Shanghai official was quoted this year saying
technology transfer for the Tesla project is “subject to negotiations.”
