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Electric cars in China

Tesla fights Chinese electric-car startups with SUV under $40,000

Mass production of Model Y at Shanghai plant seeks to overcome cost hurdle

Tesla CEO Elon Musk shows off the Model Y at the company's design studio in California on March 14.   © AP

PALO ALTO, U.S./OSAKA -- Electric-car maker Tesla will mass-produce a compact sport utility vehicle in China, seeing it as a weapon for cracking a market that has spawned a host of startups described as "Tesla killers."

The Model Y, the fourth entry in Tesla's lineup, will debut in 2020. A version due out in 2021 will start at $39,000 -- half the price of the Model X luxury SUV.

Tesla plans to build the Model Y in California, starting next year, and in Shanghai, where a factory is under construction.

Tesla has "a great team in China," CEO Elon Musk said at the unveiling in California. The new Shanghai plant "is going to be really important for making affordable versions of the Model 3 and Model Y ... for the greater China market."

The factory, to open as early as this year, will have an initial annual output level of 250,000 cars. It will be the first Chinese auto plant wholly owned by a foreign company -- a milestone made possible by the lifting of investment restrictions.

Musk thanked Premier Li Keqiang in January when visiting China for the Shanghai plant's groundbreaking. Musk's gesture demonstrates Tesla's eagerness to work closely with the Chinese government and the importance of China to the company's growth strategy.

Chinese sales of so-called new-energy vehicles -- a term that includes electric cars and hybrids -- jumped 62% to 1.25 million units in 2018 as the overall auto market shrank for the first time in 28 years to 28.08 million. Starting this year, automakers in China will have to accumulate NEV credits equal to 10% of their sales under rules meant to promote low-emissions vehicles.

Tesla's sells around 20,000 units a year in China -- less than 10% of its global volume. The company generates roughly 70% of its revenue in the U.S. but seeks to rely less on that country and boost sales in China, the world's largest auto market.

Tesla now ships vehicles from the U.S. to China, putting it at a cost disadvantage there. The trade frictions have prompted Beijing to impose extra tariffs on American-built autos. Tesla's Chinese revenue shrank 13% on the year in 2018.

The hope is that the Model Y, in the popular compact-SUV segment, will be a game changer. But the rise in China of homegrown electric-vehicle startups poses a threat.

The most prominent example is NIO, known as the Tesla of China. The company rolled out its first car just three years after its founding and listed on the New York Stock Exchange last September.

Byton, co-founded by a former BMW executive, is moving to start mass production in Nanjing with an electric SUV. The company has development teams in China, the U.S. and Europe and has built 90 prototypes, according to chief engineer David Twohig.

These newcomers are backed by tech giants like Alibaba Group Holding, Tencent Holdings and Baidu and have strong technology partnerships with them. Some analysts say they beat Tesla in speed of investment decision-making and in development of automated driving technology.

Starting production in China will not resolve all of Tesla's cost-competitiveness issues. The company's advantage lies mainly in a low-cost battery pack design, but this will be lost over time, said Colin Langan of UBS in an analysis of the cost structure of Tesla operations.

Tesla battery supplier Panasonic sounds a note of caution over the automaker's aggressive Chinese push. The Chinese economy's loss of momentum raises questions about the timing of this pivot.

"The growth curve envisioned by Tesla in China is too steep," a senior Panasonic executive said. "We have to assess risks [in China] as we decide on further investments."

Cash flow could be a problem. Mass production of the Model 3 is to cut into Tesla's profitability starting this year. The company plans to finance the $2 billion initial investment for the Shanghai factory with bank borrowing. But few lenders in China may want to work with a company in trouble with securities regulators. Tesla will have to raise more than $10 billion by 2020 to boost Shanghai's output in line with plans.

With Tesla moving to shrink its workforce, the specter of backlash from U.S. President Donald Trump also looms. General Motors has come under fire over plans to downsize its salaried staff and shutter American production facilities.

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