Tesla (NASDAQ:TSLA) had been wanting to produce cars in China for some time. Trump's tariffs may have sealed the deal.
The Wall Street Journal reports Tesla Seals deal to Build an Auto Factory in Shanghai.
Supposedly, the factory will be capable of producing 500,000 cars a year. We have seen this kind of hype from Elon Musk before.
Although the numbers may be questionable, the deal itself isn't.
Money Needed
Bloomberg commented Tesla's Missing Number in China Factory Agreement: The Price Tag.
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 $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.
“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 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 U.S. regulators.
Service Question
How the heck do those Tesla China owners get service? It takes months here to get service. How long does it take in China?
And production in China has to be at least a year away.
Will china be the new producer of parts?
Funding Question
Baird asks: How are they going to pay for the new factory? “They will have to get capital.”
Let's return to the WSJ article for a possible answer.
Local Capital
Tesla does have at least one local ally, with internet giant Tencent Holdings Ltd (OTC:TCEHY). having spent $1.7 billion on a 5% stake in the electronic-vehicle maker last year, and raising local capital to help build the Shanghai plant shouldn’t be a problem.
“If there were an opportunity for Chinese investors to go into Tesla, they’d do it in a heartbeat,” Mr. Chao said.
Not Done Before
Tesla is doing something that no foreign auto maker has done before: build a factory and a network of suppliers in China without the support of a local joint venture partner. Also, the current U.S.-China trade dispute poses a risk to Tesla if the issues should create consumer backlash against American products.
Even so, China offers opportunities for growth—especially with electric vehicles—and building its own plant allows Tesla to keep all the revenue it generates, instead of having to share it with a Chinese partner, said James Chao, Asia-Pacific automotive director at IHS Markit .
“They’ll be able to control the process far more tightly than a [joint] operation.,” Mr. Chao said. “It frees them to build this the way they want to.”
China is already Tesla’s second-biggest market after the U.S. The auto maker sold about 17,000 cars there last year, compared with roughly 50,000 in the U.S. and 103,000 globally.
In China, sales of electric vehicles are rising quickly, boosted by government policy. Chinese customers are projected to buy 3.5 million electric passenger cars in 2022, IHS Markit forecasts, up from 580,000 last year.
Enormous Electric Market
China is a big market and Tesla is going right after it. Those cars will be produced in China, not here.
Tesla wanted to build cars in China all along, but what may have sealed the deal is Trump's trade policy.
The WSJ noted "Beijing finally confirmed plans in April to phase out rules that have forced all traditional foreign makers, including Ford Motor (NYSE:F) Co. and General Motors Co (NYSE:GM)., to manufacture cars with Chinese partners to avoid paying steep import tariffs."
Batteries
In the tit-for-tat trade war, China upped tariffs on US autos and parts to 40%.
I suspect Tesla's battery production, currently in Nevada, will also head to China.
More Winning
Does anyone have a complete scorecard for all this winning? I am struggling to keep track of it all.
Tesla Viable?
I have commented several time I am neither long not short Tesla.
Bears now have a strong reason to worry.
It is likely China helps with all of Tesla's funding requirements, at least as far as building a factory in China goes.
Labor costs in China would undoubtedly plunge.
The Bull concerns are quality, timeframes, fraudulent statements, and Trump.
Even if Tesla does produce a profit, there are also P/E and debt issues.
Lesson on Shorting Story Stocks
Shorting story stocks before they break is a tough go. Those who bought the breakout at $50 are sitting on huge profits.
The market, for whatever reason, still respects this company despite the obvious and blatant lies of Elon Musk.
If Tesla can make 500,000 quality cars in China, perhaps it can turn a profit.
Fast enough to stop bleeding money? And what about the SEC, debt, and P/E ratio? Those are key questions now.
But here's the biggie:
How Will Trump Respond?
Who knows how Trump may respond to Tesla's plans to build a factory in China?
I don't, nor does anyone else. History says Trump does not need a legitimate reason to do anything.
It is conceivable Trump blocks Tesla from going to China on security grounds. He can easily cite battery technology or something else floating in the air.
Should that happen, Tesla would crater. If the SEC goes after Tesla, the stock will also crater.
If not?
Your answer to that question determines whether you are a bull, a bear, or sitting on the sidelines eating popcorn in amusement.