In an attempt to create history, Tesla is set to become the first foreign automaker to make cars in China. This would be the first time that an outside company would be manufacturing cars on its own without joining hands with a Chinese company. There will be no sharing of profits and technology knowledge. However, the final aspects of this deal are still unclear. It is believed that Tesla might partner small firms for components like batteries, lights, and seats etc.
The news about the deal was announced over the weekend. It was reported that Tesla had reached an agreement with the Government of Shanghai to build a facility in China. The deal is yet to be inked but looks to be in the final phase. The clearer picture would only come up towards the end of the year. If the deal is done, it would be a major milestone for a foreign automaker looking at the huge and fast-growing Chinese motor market. Interestingly, China is the world’s largest four-wheeler market. It has twice the number of cars on road as compared to the United States.
This would be the first time that a car maker would have 100 percent ownership of the business in China. Earlier, companies like Ford, General Motors, Volkswagen and Nissan could only enter the country after making 50-50 joint ventures with local companies. The profits and even the technology were shared. This was often seen as a drawback for foreign companies. The new policy or deal would definitely bring to the faces of foreign automakers entering China. Tesla currently exports luxury cars like Model S and Model X and loses out on a big part of the sales due to high tariffs.
Setting up a facility in China would relieve the company from shipping costs and thus improve profits. Also, the workforce in China is cheaper as compared to other parts of the world. It would also become cheaper for Tesla to export cars to other Asian countries like Japan, South Korea, and Malaysia via sea routes. However, the biggest issue for Tesla to set up a plant in China would be battery components. Batteries are not only the most expensive but the heaviest components of electric vehicles. Currently, has Tesla battery manufacturing facility in Nevada. The battery per vehicle costs Tesla $15,000 to $20,000.
The move to have a production facility in China was fueled by the country’s need to reduce pollution and look for cleaner sources of energy. There have been serious steps to phase out internal combustion engines from the country. Tesla is expected to have Panasonic set up a battery manufacturing outside Shanghai. But Panasonic is owned by Japan and South owns LG and Samsung who are the front line battery manufacturers in the world today. So, it is not clear whether these companies would also get the same privilege as Tesla in China. Another major hurdle for Tesla is to get the necessary finance for setting up a new facility in China. Ever since its inception, the company has been working in a startup mode and hasn’t made significant profits.