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Wednesday, July 11, 2018, 10:51
Tesla plots bold China factory move, stays silent on cost
By Bloomberg
Wednesday, July 11, 2018, 10:51 By Bloomberg

People visit a Tesla showroom in Beijing on July 4, 2018. (WANG ZHAO / AFP)

Tesla Inc and the Shanghai government have left out a crucial detail in announcing a groundbreaking deal for the biggest name in electric cars to build its vehicles in China: how much it’s all going to cost.

Chief Executive Officer Elon Musk sealed a crucial agreement Tuesday to start building its second car assembly plant in the world. Construction will begin soon after approvals and permits are secured, and the first vehicles will roll off the line within roughly two years, a Tesla spokesman said in an email. It’ll take another two to three years for the factory to reach its capacity to build about 500,000 vehicles annually.

The preliminary agreement is a major development in Tesla’s more than yearlong effort to open China’s first production facility that will be wholly owned by a foreign carmaker. But the absence of detail about the size of the investment is turning heads because the Musk-led company had just US$2.7 billion in cash at the end of the first quarter. Tesla has been burning through billions of dollars as it’s struggled to ramp up manufacturing of the Model 3 sedan.

ALSO READ: Musk: Tesla manufacturing to shift from 'hell' to strength

“The biggest question right now for investors - bulls and bears alike - is how are they going to pay for it,” Ben Kallo, a Robert W. Baird & Co. analyst with the equivalent of a buy rating on Tesla shares, said in a Bloomberg Television interview. “They will have to get capital.”

Tesla is both looking to expand its capacity and to more efficiently reach global markets. Musk, 47, said more than two years ago that he expected Tesla to produce more than 500,000 vehicles in 2018 at its lone car-assembly plant in Fremont, California, but the company is well off that pace because of the Model 3’s slow start. It’s built a total of about 88,000 vehicles through the first half of this year.

Tesla’s quest to construct its third so-called gigafactory gained urgency as Donald Trump has engaged in a trade war that’s ensnared imports of US vehicles into China. The company boosted prices of Model S sedans and Model X crossovers in the country by as much as US$30,000 after Beijing imposed additional duties on American-built autos and put its vehicles beyond the reach of more consumers in its No. 2 market globally.

Tesla follows Harley-Davidson Inc. in charting plans to expand outside the US to circumvent tariffs under Trump’s escalating trade disputes. While the motorcycle maker’s shares have slumped amid attacks by the president, Musk’s plans have so far avoided controversy. The carmaker’s stock rose 1.2 percent Tuesday in New York trading.

The carmaker also has a giant battery factory in Nevada. After moving ahead in China - the world’s largest market for electric vehicles - Musk has said he will reveal plans toward the end of this year to build a plant in Europe.

Tesla is both looking to expand its capacity and to more efficiently reach global markets

A year ago, Tesla said it was working with the Shanghai government to explore local manufacturing. In addition to avoiding China’s import duties on US-made cars, a plant in China also will reduce shipping costs and potentially make sourcing components more economical.

 “I think that you’ll see something similar to what they did in Nevada, with a partner like Panasonic,” said Kallo, referring to the gigafactory that Tesla and its Japanese battery-cell supplier operate along near Reno. “I’m not saying that Panasonic will be the partner, but you’ll see someone step in there, and I think those details will be announced in the next one, two, three months.”

In November, Musk said Tesla was about three years away from starting production in the world’s biggest auto market. At the time, he suggested the plant would supply China and potentially other parts of Asia with a couple hundred thousand vehicles a year - less than half the new projection.

Tesla probably will make the smaller Model 3 sedan and upcoming Model Y crossover in China, Musk said in November, rather than the pricier Model S or Model X that often sell for more than US$100,000 in the US.

China’s fast-growing market for new-energy vehicles presents a massive growth opportunity for Tesla. The category - which includes battery-powered, plug-in hybrid and fuel-cell automobiles - reached 777,000 units last year and could surpass 1 million sales in 2018, according to the China Association of Automobile Manufacturers. The government’s target is 7 million vehicles a year by 2025.

Tesla sold 14,779 vehicles in China last year, according to data from LMC Automotive. That gave it about 3 percent of the nation’s battery-powered electric-vehicle market, placing it as the No. 10 brand in that segment. China accounted for 17 percent of Tesla’s 2017 revenue, according to a filing with US regulators.

READ MORE: Tesla close to Shanghai plant deal

“Tesla is deeply committed to the Chinese market, and we look forward to building even more cars for our customers here,” the company said in its emailed statement.

Ramping up manufacturing in Fremont first is critical to Tesla being able to sustain itself financially. The company produced 5,031 Model 3s in the last week of the second quarter, meeting a target that Musk had said was crucial to generating cash and earning profit. The CEO has said that the company won’t need to raise more money this year.

Tesla may be holding off on “formal messaging” about its China plans until it shows more meaningful steps toward profitability, said Brad Erickson, an analyst at KeyBanc Capital Markets with the equivalent of a hold rating.

“A factory in China will almost certainly require an incremental capital raise,” he wrote in a report to clients.

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