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Tesla's 'China Gigafactory' project moves closer to reality

CEO Musk wants full ownership but Beijing may oppose

Tesla has faced difficulties launching mass production of the Model 3.
Tesla has faced difficulties launching mass production of the Model 3.   © Reuters

PALO ALTO, U.S./TOKYO -- Tesla's talks with Chinese officials to build an integrated "Gigafactory" in Shanghai producing batteries and automobiles have progressed to the final stage, the American electric vehicle maker said Tuesday.

Tesla faces poor earnings and investor criticism as it struggles to launch mass production of its new Model 3 electric vehicle. The company hopes the planned factory will revive expectations of growth, as the market for so-called new-energy automobiles in China is expanding rapidly.

The company created a wholly owned subsidiary in Shanghai last month to prepare for construction of the plant, China's government disclosed recently. The subsidiary is capitalized at 100 million yuan ($15.6 million), put up by Tesla’s Hong Kong unit.

Tesla CEO Elon Musk asked U.S. President Donald Trump on Twitter in March to call for Beijing to ease restrictions on foreign capital. The California-based company reportedly insists on parent-only investment in the planned factory, a policy that aids decision-making and inhibits technology leakage.

But Tesla faces high hurdles in receiving permission to build the new electric vehicle plant by itself, said Jin Tang, senior research officer at Mizuho Bank, who is familiar with the Chinese automobile industry. Some think China's government is reluctant to permit a foreign automaker to build a factory on its own because Beijing wants to develop and protect the domestic auto industry.

Tesla CEO Elon Musk hopes the planned "China Gigafactory" will revive expectations of growth. Tesla CEO Elon Musk hopes the planned "China Gigafactory" will revive expectations of growth.   © Reuters

Tesla’s subsidiary in Shanghai is designed for technological development and the trading business, driving speculation that the automaker may form a manufacturing unit in partnership with a Chinese company.

Chinese media reports suggest Tesla will pick Shanghai Lingang Economic Development (Group), which manages industrial parks in Shanghai, as its partner for production in China. The American company may shun the idea of a Chinese automaker as its joint venture partner in order to avoid technology leaks, Tang said.

Tesla will have to solve the question of battery procurement if it builds its next Gigafactory in China.

Panasonic supplies batteries to Tesla in the U.S. The Japanese company said it would prioritize examining how to supply the Shanghai plant if asked, but denied receiving any specific request.

Though Panasonic operates a battery plant in the Liaoning Province city of Dalian, the site produces square batteries rather than the cylindrical versions used by Tesla. Producing batteries for Tesla in China likely would require heavy investment by Panasonic.

Electric vehicles that adopt batteries from makers designated by the Chinese government are eligible for subsidies on a preferential basis. But this "white list" consists primarily of Chinese producers.

Tesla vehicles are being assembled by robots at a plant in Fremont in the U.S. state of California. Tesla vehicles are being assembled by robots at a plant in Fremont in the U.S. state of California.   © Reuters

Among possible battery suppliers, Tang ruled out BYD as it is Tesla’s rival in the market for electric autos. The researcher sees Contemporary Amperex Technology, which mainly manufactures square batteries, as a possibility.

Tesla began negotiations last year with the Shanghai city office and others to work out a construction plan. But barriers such as Chinese restrictions on foreign capital have delayed the work. Musk has called the trade relationship unfair, noting that Chinese automakers are permitted to operate on their own in the U.S.

The company reportedly earned 10% to 12% of its sales from mainland China during the year ended in December. Tesla shipped all of those vehicles from the U.S., as it has no manufacturing plant in China.

A U.S.-China trade war would harm Tesla, with Beijing likely to impose additional tariffs on cars imported from the U.S. Construction of a plant in China is indispensable for Tesla’s further growth.

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