Tesla Steals Big Auto's Chinese Lunch (Apparently)

 | Oct 26, 2017 | 10:00 AM EDT
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Overseas carmakers will be encouraged by a report that Tesla (TSLA) has won permission to build a factory of its own in China, which would be a first for a foreign brand. The suits sitting in smog-cloaked Beijing want to see China's roads populated by plug-in, not petrol-charged cars. It will happen. In China, what Beijing says, goes. And it looks like Tesla will be there to capitalize.

Other foreign automakers could follow suit. The only problem is that heel draggers such as Mercedes-Benz (DDAIF) , General Motors (GM) and Fiat Chrysler (FCAU) have yet to produce any vague form of popular category filler, let alone a "category killer," in the "new-energy vehicle" market that China so desperately wants to encourage.

Tesla has agreed a deal to build a factory in Shanghai that it will own 100%, according to The Wall Street Journal. That's significant because Tesla, with so much intellectual property at stake behind its battery technology, would not have to hand it over to a joint-venture partner. Such joint ventures are required by law for car companies, so that's a process that has taken place with every other foreign manufacturer operating in the Middle Kingdom. The tech transfer makes foreign partners wary, and rightly so. Most Chinese partners will rip off your tech and copy it right away.

Tesla would be able to wholly own the Shanghai operation because it would be built in the city's new free-trade zone. The company would still have to pay the 25% duty that China charges on imported cars. But the location would cut down dramatically on production and distribution costs, and expand production of its sole car factory so far, in Fremont, Calif., which simply can't make enough cars. A good problem to have.

The Vietnamese city of Danang will play host to potential comedy when Trump attends the meeting of 21 APEC heads of state.

I explored this topic as a guest on the show Money Talk on Wednesday, where we had a three-way discussion on the topic, on Hong Kong's RTHK Radio 3. Here's the link to that specific podcast. We also considered the fascinating and probably hilarious meeting due to take place between Chinese President Xi Jinping and his U.S. counterpart Donald Trump when Trump arrives in Beijing for a three-day visit starting Nov. 8. Both leaders will also assemble from Nov. 11-12 for the APEC summit of the heads of state of the 21 member nations in Danang, Vietnam.

Tesla has not, as you may have got the impression, confirmed that it will build the Shanghai plant. Officially, the company merely repeated its statement, first made in June, that it is in talks with the Shanghai Municipal Government "to explore the possibility" of opening a factory there. 

It promises to "more clearly define our plans for production in China" by the end of the year. It expects to continue to produce most of its cars in the United States, but believes it also needs to establish local factories overseas. Europe is another potential plant location.

Its pioneering Shanghai plant would be well watched by the trifecta "alliance" of Renault (RNLSY) , Nissan Motor (NSANY) and Mitsubishi Motors  (MSBHY) , currently the world's largest producer of electric cars. Combined, they had shifted 481,000 units of cars such as Nissan's Leaf, Renault's Zoe and Mitsubishi's i-Miev as of the end of June.

Renault and Nissan are teaming up with Wuhan-based Dongfeng Motor Group (DNFGY) on an electric-vehicle joint venture in China, the partners announced in August. But Dongfeng will own 50% of the joint venture, eGT New Energy Automotive. Renault and Nissan will each own 25%, the companies said. The first offering will be based on a small sport/utility vehicle that Renault and Nissan already produce together. Nissan makes the Leaf in China, but it hasn't designed an electric car there - this would be the first.

China is already the world's largest consumer of electric vehicles, with more than 300,000 sold last year, and a similar amount made. But the Chinese government would like to see e-production capacity to increase to 2 million units per year by 2020.

That's part of a broader push to meet a target that "new-energy" electric, plug-in hybrid and fuel-cell cars make up at least 20% of total vehicle sales by 2025. And when the government sets a target in China that it controls, in a market where it grants all the licenses and approves all production, it gets its way.

I was also just in Danang, and witnessed motorcade after motorcade heading to nearby Hoi An as the VIP finance ministers from the 21 APEC nations got together in a preliminary meeting, APEC's second-most important. It's a dress rehearsal for the gathering of the leaders early next month. What a dress rehearsal, too! Southeast Asia loves its uniforms, and every arm of the Vietnamese disciplined services was out and in effect.

It's a big deal for Vietnam to host APEC, particularly after the United States pulled out of the Trans-Pacific Partnership, which was meant to benefit Vietnam more than any other nation with U.S. participation. The TPP would have allowed much more liberal interpretations of the "Made in XX" tag, with the bulk of production for instance able to take place in Vietnam while a Mazda (MZDAY) retains a "Made in Japan" stamp of approval.

The remaining 11 members of the TPP are now deciding how to proceed without the United States. Trump pulling the United States out of the deal is, to me, a huge mistake. It would have lowered tariffs massively on U.S. exports such as beef, cars and pharmaceuticals heading into Japan. The United States has no bilateral trade deal with the world's third-largest economy, and must now become great by doing all that spadework on its own.

It would also be a great coup for Shanghai to lure a Tesla factory. The city is the de facto capital of auto production in China. Having Tesla as its tenant would cement it and encourage development not just of cars for China, but likely models for the rest of Asia, the rest of the world, too.

I'm actually waiting for that flow of cars out of China to happen. It's not only the largest consumer of cars, but also the largest producer as well. I'm certain that Chinese car makers such as Quoros and Chery will undoubtedly begin to make cars that prove popular overseas, following the lead of first Japanese carmakers such as Toyota Motor (TM) and Honda Motor (HMC) and then Korean competitors such as Hyundai Motor (HYMTF) , Kia Motors (KIMTF) and SsangYong Motor KR:003620.

China is home to the top six producers of electric vehicles, according to Bloomberg's New Energy Finance unit. BYD (BYDDY) tops the unit's global index of the industry's e-makers, followed by Jiangling Motors SH:000550 and BAIC Motor (BCCMY) .

Ford Motor (F) said it is evaluating the merits of forming a joint venture with Anhui Zotye Automobile SH:000980 to produce electric vehicles in China. So far, no U.S. producer made the top 10 of the world's top electric-vehicle makers.

Mercedes-Benz and BMW haven't been much better about developing proper versions of their gas guzzling sedans to compete with Tesla. That's why - until the government unwisely removed its tax waiver on the purchase of new electric cars - Tesla was destroying its nearest competitors in the luxury sedan market here in Hong Kong. Now, I'm sure thanks to lots of complaining from the conventional car makers, the waiver has gone, petrol-engine cars are slightly cheaper, and no one is buying a Tesla in Hong Kong. As Trump would say, "Sad."

Big auto makers have been unbelievably slow at plugging in. They have had more than two decades to do it, and have let a totally untested maker in the former of Tesla completely steal the market. Finally, Merc parent Daimler (DDAIY) has a joint electric-car brand in China with BYD, and BMW (BMWYY) has set one up with Brilliance China Automotive Holding (BCAUY) .

But Chinese-made Teslas selling in China will provide fierce competition. It has first mover advantage with a fully owned factory, if that goes ahead. China's category killer indeed.

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