Tesla Could Benefit From China's New Rules for Foreign Auto Makers

Tim Higgins

The Wall Street Journal

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@timkhiggins
tim.higgins@wsj.com

Updated April 19, 2018 4:13 a.m. ET

China’s announcement Tuesday that it will ease its strict joint-venture rules on foreign auto makers could benefit Tesla Inc. TSLA 1.97% at the same time the Silicon Valley auto maker needs a charge.

Tesla has long sought to manufacture its electric cars in China—its second-biggest market, after the U.S. But it has shied away from conforming with China’s rules requiring a 50-50 joint venture with a local company and the sharing of any profit and technology. So its cars instead are imported from California and subject to a 25% tariff.

The Chinese government now plans to phase out those restrictions for auto makers by 2022, and eliminate the rules this year for companies such as Tesla that make electric vehicles.

That would make it possible for Tesla to build a factory in China and not face the tariff, while auto makers such as General Motors Co. or Volkswagen AG, which established joint ventures in China years ago, might find it difficult to unwind longstanding relationships.

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Tesla Could Benefit From China’s New Rules for Foreign Auto Makers

“I don’t see anyone walking away from their JV partner and going alone because it’s a lot of effort to unwind that,” said Jeff Schuster, an analyst for LMC Automotive. “Tesla is the big winner…as long as they have enough funding to establish themselves in China.”

A Tesla spokesman declined to comment.

Tesla has been working with the Shanghai government on a deal to build a wholly owned factory in the city’s free-trade zone. The company said in November it plans to direct money toward building a China factory next year, with the aim of starting production in three years. It eventually wants to churn out some 200,000 vehicles a year there, including less-expensive models such as the new Model 3 compact sedan and the coming Model Y compact sport-utility vehicle.

But the company hasn’t proven it can crank up production to build a mainstream electric car. It has stumbled in building the Model 3 since beginning production in its Fremont, Calif., factory last July, twice delaying its goal of making 5,000 Model 3s a week until around the end of the second quarter.

Tesla said Monday that it plans to halt production of the Model 3 for about a week for upgrades intended to speed up production.

The difficult ramp-up has squeezed the company’s cash position and tested the patience of investors, whose excitement last year over the prospect of Tesla becoming a mainstream auto maker pushed its market value above GM.

Despite the 25% tariff raising prices in China, Tesla’s business there has experienced significant growth. Revenue in China doubled to $2 billion last year from $1 billion in 2016.

Write to Tim Higgins at Tim.Higgins@WSJ.com

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