Musk breaks ground on Tesla's Shanghai factory

The China plant is the result of years of negotiations with Beijing and a personal triumph for Elon Musk, who faced a disastrous 2018.
The China plant is the result of years of negotiations with Beijing and a personal triumph for Elon Musk, who faced a disastrous 2018.PHOTO: REUTERS

BEIJING • After four years of planning, Tesla Inc is finally breaking ground for its US$5 billion (S$6.8 billion) factory in the world's biggest auto market. But the timing could not be more inauspicious.

Chief executive officer Elon Musk was in Shanghai to lay the foundation yesterday for what would be the electric-vehicle maker's first car-manufacturing facility outside the United States.

While the event marked a new journey in Tesla's 15-year history, it came at a point where China's economy is showing signs of strain following the tariff spat with the US.

The billionaire entrepreneur is facing a car market that probably shrank last year for the first time since at least the 1990s as uncertainties surrounding the trade war between the world's two biggest economies, signs of weakening domestic demand in China and a stock slump take a toll on consumers.

The challenging environment also includes competition from several start-ups that all want to be like Tesla.

The China plant is the result of years of negotiations with Beijing, and a personal triumph for Mr Musk, who faced a disastrous 2018.

The US Securities and Exchange Commission moved to punish Tesla last year after Mr Musk's infamous "funding secured" tweet, with fines and a settlement that required corporate governance reforms. It also came on the back of Tesla's ability to ramp up production of Model 3 sedans, marking the beginning of a turn in market sentiment.

A fully owned facility would also mean Tesla would not need to share its profits and technology with Chinese partners, unlike other foreign carmakers, which are required to form a domestic joint venture. Domestic production would help shield Tesla from import duties as the US and China find ways to wriggle out of the tariff quandary.

A Chinese plant may be crucial for Tesla, which is struggling to stave off a potential dip in demand at home, its biggest market, after reductions in federal tax credits for electric vehicles. The company cut the prices of all its models by US$2,000 to partially offset the loss of the subsidy.

A fully owned facility would also mean Tesla would not need to share its profits and technology with Chinese partners, unlike other foreign carmakers, which are required to form a domestic joint venture.

Domestic production would help shield Tesla from import duties as the US and China find ways to wriggle out of the tariff quandary. The two sides have called a truce and are engaged in talks to cool tensions, with China temporarily scrapping the retaliatory 25 per cent tax starting on Jan 1.

At the height of the dispute, when China imposed the additional duty on American-made autos, Tesla sales in the Asian country, its second-largest market, plunged to as low as 211 in October, from 3,552 in June, according to data compiled by Bloomberg Intelligence. In November, they clocked 393.

The drop in the numbers is not just a direct effect of the trade war. Stock losses in China last year wiped out more than US$2 trillion worth of wealth, denting consumer appetite for luxury goods.

Passenger car sales declined for six consecutive months to November, and are on course for an annual decline.

A key China purchasing managers' index fell below 50 last month to its lowest reading since May 2017, signalling weakening demand in the country's US$12.2 trillion economy.

Tesla signed a preliminary agreement in July with the Shanghai government last year to build the 500,000-unit factory in the Chinese city. In October, it said it paid about US$140 million to secure more than 81ha of land for the planned Gigafactory 3.

The facility is expected to churn out about 250,000 vehicles annually at first - the Model 3 and the planned Model Y - and that capacity will double over time.

Tesla, which has said that it plans to use mostly local debt to fund the factory, plans to start production this year.

The company may initially start off with a general assembly facility and investors should not expect production to start this year, according to Mr Maynard Um, an analyst at Macquarie Capital (USA) Inc.

"While this may not produce the same tariff reduction benefits, we expect there would still be some model benefit, particularly as the company vertically integrates the supply chain within China," Mr Um wrote in a note on Jan 3.

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A version of this article appeared in the print edition of The Straits Times on January 08, 2019, with the headline 'Musk breaks ground on Tesla's Shanghai factory'. Print Edition | Subscribe