The mayor of Shanghai and the CEO of Tesla Inc. (NASDAQ: TSLA), Elon Musk, on Tuesday signed a memorandum of cooperation that permits Tesla to build the first auto assembly plant in China that will be wholly owned by a foreign entity. The agreement was first reached in late 2017 and it has taken this long to wade through the red tape that central and local authorities live behind.
According to a government statement, Tesla plans to build 500,000 vehicles annually in the plant when it is fully ramped up in four or five years. Construction of the plant will take up two of those years, according to Tesla spokesperson cited by The Wall Street Journal.
Other foreign carmakers, including GM, BMW and Volkswagen all build vehicles in China, but they were required to team up with Chinese firms in 50-50 joint ventures. The central government recently approved plans to lift these restrictions, and that could pave the way for these other carmakers to buyout their Chinese partners.
China’s market for Tesla vehicles is second only to the United States in volume. Last year the company sold 17,000 cars in China but that number could take a serious hit this year. China’s retaliatory tariffs on goods imported from the United States includes electric vehicles. The added 20% drives the cost of a Model S 75D from about $115,000 to nearly $142,000. A Model X 75D SUV that cost $125,000 a week ago now costs $155,000.
Tesla will need a pile of cash to build a plant in China, but it has not revealed how much the plant will cost. At the end of the first quarter, the company had about $2.7 billion in available cash, but that hardly seems like enough. And while Musk has stated that Tesla won’t have to tap the capital markets again this year, it’s a cinch that the company will need to raise more funds.
That may be easier than many people believe. One of China’s largest internet companies, TenCent Holdings, paid $1.7 billion for a 5% stake in Tesla last year. James Chao of IHS Markit told the Wall Street Journal, ” If there were an opportunity for Chinese investors to go into Tesla, they’d do it in a heartbeat.”
The Chinese government has set a target of 7 million electric vehicles on China’s roads by 2025. That’s nearly 10-times the 777,000 EVs at the end of 2017. Tesla garnered about 3% of that market, but it’s high-end Model S and Model X vehicles remain out of reach for the vast majority of the Chinese population. The Model 3 and a proposed Model Y are priced more attractively for buyers with average incomes.
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