Tesla to open plant in China, first foreign car manufacturer to do so

  • preliminary deal

Oct 24, 2017-

Tesla is moving closer to becoming the first foreign car company to have a wholly owned manufacturing operation in China, a deal that would test the relationship norms between a foreign automaker and the Chinese government.

For Tesla and other manufacturers, their production options in China are limited by the government. One option is to set up a joint venture, sharing much of their technology and profits with a Chinese partner. The other is to manufacture in in China, protecting their secrets but forking over steep tariffs.

Carmakers usually end up in a joint venture. That Tesla is striking a different deal reflects China’s global ambitions to dominate the electric car industry.

The company has a preliminary deal with the Shanghai municipal government that would give Tesla ownership of its facility, two people familiar with the negotiations said on Sunday.

The operation would be located inside a free-trade zone, said the two people, who insisted on anonymity because they were not authorised to discuss the talks. Being inside a foreign trade zone means that unless Tesla can negotiate a special exemption, the cars could still be subject to China’s steep tariffs—treated as though they were still being shipped from outside China even though they were being produced in the country.

The preliminary deal still offers Tesla control over its trade secrets and may give the company leverage to negotiate better terms with the Chinese government in the future. Tesla hopes to complete the deal by the end of the year, the two people said.

Any comprehensive arrangement would still require the approval of the central government in Beijing. The Beijing authorities have sometimes used their power to delay deals or demand further concessions from foreign investors.

Persuading Tesla to build cars in Shanghai while still paying tariffs on them would be a coup for the Chinese government. If Tesla were making cars in the Shanghai area, it would have a powerful incentive to buy many, if not most, of the parts in China, strengthening China’s base of suppliers for the fast-growing electric car industry.

China already has the world’s largest market for electric cars. Their dominance is a byproduct of the government’s extensive subsidies, part of a broader plan to shift the country away from gasoline-powered cars. 

China also has the steepest barriers to automotive trade of any large market in the world, making it difficult to compete in the Chinese market without producing in the country. Beijing has been able to retain steep tariffs and other obstacles to imports because it insisted that it was a developing country when it entered the World Trade Organisation in 2001.

The WTO has allowed developing countries to retain much higher trade barriers than industrialised countries, on the theory that they have infant industries that may not have grown big enough to withstand global competition. Today, however, China has the world’s largest auto industry. China charges a tariff of 25 percent on imported cars, compared with 2.5 percent in the United States and 9.8 percent in the European Union. China also has a 17 percent value-added tax—a kind of sales tax—that is charged not only on the price of the car but also on the tariff, so that the taxes are effectively compounded.

Unlike these taxes, the costs of shipping a car across the Pacific are tiny. They can be as little as 1 percent of the cost of a high-priced model like Tesla’s offerings. “Shipping costs are usually not a big deal—it is the 25 percent tariff” that keeps out imports, said Yale Zhang, the managing director of Automotive Foresight, a Shanghai consulting firm.

Robert Lighthizer, the United States trade representative, has expressed concern about China’s trade practices. President Trump is set to visit Beijing from Nov. 8 to 10, but China has shown little sign of willingness to negotiate on sectors that it regards as strategic imperatives, and electric cars are one such industry.

If the deal does come to pass, Tesla would have achieved a breakthrough of sorts in being preliminarily allowed to have a wholly owned operation in a foreign trade zone. Tesla said in June that it was negotiating to produce cars in Shanghai. 


Published: 24-10-2017 08:45

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