The media rushed to cover Tesla's announcement of a manufacturing facility in China yesterday, but, as usual, the major details were ignored. For instance, who is going to pay for it? Also, who will buy the cars?
With a projected capacity of 500,000 units in 4-5 years after ground is broken and no local partner, though, Tesla is taking a large risk in committing capital to a market in which the company is a mere niche player. The question of what entity will eventually commit the capital is a relevant one, as Tesla's massive cash burn and debt-laden balance sheet make such an expenditure impossible as currently constructed.
Will Panasonic come to the rescue and fund the Lingang plant, already dubbed Gigafactory 3, just as it has funded the construction of Gigafactory 1 in Nevada and Gigafactory 2 in upstate New York? Will Chinese tech giant Tencent Holdings, which took a 5% stake in Tesla in March 2017, provide fresh capital for Tesla's Chinese adventure? I don’t know the answer to those questions, but it is clear through my analysis that there is no way Tesla can fund the building of an additional assembly plant from internal resources.
A Tesla Inc. logo is displayed on a parking space for charging electric vehicles in Beijing, China, on Saturday, July 7, 2018. As a trade war looms, one of Chinese President Xi Jinping's biggest weapons could be boycotts of American brands by his country's legion of consumers. Photographer: Giulia Marchi/Bloomberg
According to the Chinese Association of Automobile Manufacturers Tesla ranked 11th in sales of New Energy Vehicles in China in 2017, a market that totaled a massive 1.2 million vehicles. Tesla posted sales of 14,883 units in China in 2017, barely half of the sales of the number 10 player, Geely, and not even 20% of the sales of the number one player, BYD. Yes, those figures include plug-in hybrids, which Tesla does not offer, but preliminary 2018 results show that Tesla is falling behind even further as Chinese buyers snapped up purely electric vehicles--battery-electric vehicles or BEVs--in the first half to snag government subsidies.
My favorite source for Chinese auto news, Gasgoo’s automotive news portal, reported these figures today for BYD:
From January to June, BYD NEV sales reached 71,270 units, soaring 106% from a year earlier. The remarkable NEV sales performance made BYD China's first automaker who achieved output and sales exceeding 360,000....Cumulative sales of (B)EVs reached 23,840 units during the past six months, leaping 49% from a year earlier.
So, that's what U.S investors need to understand. Tesla is by far the dominant player in BEVs in the U.S., and I estimate their share of the nascent U.S. purely electric BEV market at an incredible 75%. Tesla's domestic competition for purely electric vehicles consists mainly of the Chevy Bolt and Nissan Leaf, two models that look like the small-sedan, three-box cars that American buyers fell out of love with 25 years ago.
The Models 3, X and S are numbers 1, 2, and 3 in sales of BEVs in the U.S., but Tesla does not even crack the list of top 10 purely electric vehicles sales in China based on Gasgoo's numbers. That list is populated by models that I am certain you've never heard of, including the Baojun E100, Emgrand EV and Roewe E50. But the real danger to Tesla isn't tiny city cars with low range and few modern conveniences, it is the presence of BEVs that are attractively designed and have state-of the art interiors.
OEMs in China have wisely decided that in addition to selling BEV sedans they should also package electric powertrains with the crossover-style SUV bodies that consumers there like just as much as Americans do. That's a great decision, and new entrants like Byton with its M-Byte--due in 2019--and NIO, which began delivering its ES8 crossover in late June, are coming to the market first with crossovers.
Byton was founded by ex-BMW executives and is backed by Chinese auto giant FAW and recently-IPO'd battery colosssus CATL. NIO's inventor list is a who's who of Asian tech giants, including Tencent, Singaporean sovereign fund Temasek, and Baidu among others.
So, Tesla's huge head start in the Western markets for high-end BEVs simply does not exist in China. Tesla is behind the curve in the world's largest BEV market and the increase in tariff on imported vehicles from 15 to 40 percent has caused the company to raise prices on the Models S and X to levels that even wealthy Chinese will find difficult to afford. That tariff was cut in May to 15% from 25%, but last week's increase to the punitive 40% level shows how quickly shots can be fired in a trade war.
China’s a tough market to crack, and for a company that runs a massive working capital deficit (Tesla’s payables were more than four times its receivables at March 31st) and needs a tent to complete final vehicle assembly, that's a tough ask. As evidenced by the rash of senior executive departures in recent months, Elon Musk seems to like to do things on his own. But the Chinese market, which has flourished through so many East-West partnerships, is a very different animal, and Tesla simply does not have the capital to compete there.