China represented just 17% of revenues at Tesla (TSLA) in 2017, but the company has had longstanding hopes for major upside there on two fronts. First, it's looking for improved car sales, and second, it wants to build a factory there.
But so far, 2018 has been a disaster for TSLA in terms of car sales in China. As this chart of Chinese plug-in car sales from May shows, the only Tesla to make the top-20 list was the Model X, and it sold just 4,758 units in 2018's first five months.
That's 4,758 units in the entire country of China, a nation of some 1.4 billion people who collectively bought 25 million cars in 2017. By comparison, Volkswagen (VLKAY) sold 258,081 cars in China in just December 2017, while Buick sold 129,828 units. But Tesla has only been averaging around 1,000 units per month of the Model X, its best-selling car in China. That practically rounds down to zero.
Yes, that's up 644 units from the 4,114 Model Xs that Tesla sold in China during 2017's January-to-May time period. But c'mon, being up 644 units in the entire country of China is a total joke for a company that's valued like a hyper-growth entity.
Where will Tesla's China sales go in the coming months? That will largely depend on U.S.-Chinese trade negotiations' outcomes.
Chinese tariffs on U.S. cars had been 25%, but Beijing was in the process of lowering that to 15%. But most recently, China has signaled that it will increase tariffs to 40% or 50% in response to U.S. trade pressure. If that happens, Tesla's sales in China will go from ultra-tiny to something even smaller (as if it even matters at this point).
On the other hand, if President Donald Trump can pressure China to lower its tariffs from 25% to 15% to perhaps even zero, then Tesla stands to benefit. Basically, there are few people in the world who are praying as hard for President Trump to succeed as Tesla CEO Elon Musk is.
About That Factory: Too Little, Too Late
We've been hearing incessantly for at least the last year or two that Tesla was going to build a factory in China. Most recently, Musk promised at Tesla's annual shareholder meeting two weeks ago that we would -- finally! -- get the details on this factory in July.
Now, lots of foreign car companies have factories in China, but they're only allowed to own 50% stakes in them. This is a problem for those automakers because these operations have generally been profitable, so they'd rather not share the profits involuntarily.
But Tesla is famous for losing money hand over fist. Operating margins are double-digit negative and Tesla is saddled with massive debt. The company's interest expenses per car sold exceed $4,800 -- an amount on the order of more than 100 times higher than that of most other major automakers.
As a result, it's not obvious that anyone would like partner with Tesla on a Chinese factory. After all, why would you want to sink money into a business that loses money?
But let's assume that Tesla can find a partner or two for a Chinese factory under terms that are favorable to the partner, including keeping the entity away from exposure to Tesla's massive corporate debt. I'd imagine that Tesla would seek to keep any such terms secret from its U.S. investors, lest they learn that they're getting the short end of the stick.
Let's see if Tesla comes clean at this soon-to-happen announcement in July. I imagine that we'll learn that Tesla left all sorts of important factors out of whatever its initial announcement will be.
However, for the sake of argument, let's simply assume that Tesla does pull this off -- it manages to find one or more partners, obtain financing and get started on a Chinese factory. What does that mean?
Well, first it would mean that TSLA would only be making cars in China in about two to three years. After all, it takes time to build a factory and to get quality production up and running. (And it takes even longer time for a company that doesn't, in my opinion, have any good experience doing this, such as Tesla.)
But two or three years from now will be 2020's second half, or even 2021. By then, I believe that the competitive landscape will have long since left Tesla in the dust. The U.S. market alone will likely have 150 electric car models on the market by 2022, and in China there will probably be even more. Tesla will likely enter the Chinese market with a domestically produced car that's years behind those of a long list of competitors.
Who are these competitors? First, all of the established automakers who already have numerous Chinese car factories -- with many more already under construction that will be finished long before Tesla's. Second, there's a long list of electric-car startups that are entering the market right about now and are in most cases Tesla's direct competitors.
Many of those companies are "native" Chinese, and therefore have all sorts of advantages over Tesla in terms of operating and selling over there. And they're run in some cases by ex-executives from companies such as BMW (BMWYY) and Ford (F) , so they also have development and management experience to count on.
Many other rivals are also very powerful automakers that already have a global reach. Chinese automaker Geely might be the best example, as it owns Volvo and builds cars not only in China, but also in Sweden, Belgium and South Carolina. Similarly, U.S.-based electric-car maker SF Motors has factories in both China and the United States. Chinese automakers Byton and NIO are other good examples.
Conclusion: Tesla's Prospects in China Are Very Dark
Add it all up and Tesla is an ultra-tiny brand in China, barely making the top-20 list of bestselling plug-in models. It's far to the right of the decimal point -- a non-factor in the Chinese market today.
In the short term, the best Tesla can hope for is that Trump succeeds in getting China to lower its tariffs to look more like America's 2.5% tariff on Chinese cars.
But over the long term, Tesla will likely be overshadowed by the significant time-to-market advantages held by all the other automakers that sell in China. They'll be able to make many more electric cars at far lower cost than Tesla will for years to come.