From being the only foreign darling with a wholly-owned factory in China to being the target of Chinese officials and official media, Tesla’s recent experience in China has raised concerns among industry and commentators. Experts say that Tesla has run into the typical Chinese Communist Party playbook of “bait-and-switch,” which is to use domestic anti-American public opinion against foreign companies with key technologies to increase leverage to force technology transfers.
Experts are calling on the U.S. to be more vigilant in the Tesla case, as Beijing’s intent is not only to “limit market share” to protect its competitors, but also to force Tesla to reveal information about other projects with the U.S. government, such as Space X, a private manned aerospace project of national security concern.
The “bait-and-switch” script paradigm
Miles Yu, a senior fellow at the Hudson Institute, summarized to VOA the Communist Party’s overall approach to foreign investment, particularly those with key technologies and proprietary innovations. “It’s a “‘bait and switch,’ where you are lured into China with initial tax incentives and regulatory measures; once hooked and having achieved initial success in China, the CCP does not hesitate to use its investments in China as a lever to directly or subtly to force them to comply with a range of requirements.”
This is pretty much the blueprint for Tesla’s development in China.
In 2018, Tesla was approved to build a factory in Shanghai, making it the largest foreign manufacturing project in the city. That broke a ban on foreign car companies setting up wholly owned subsidiaries in China since the 1990s, and allowed Tesla to be seen for a time as a model for foreign operations in China.
According to Bloomberg, Beijing not only opened up the huge Chinese electric car market to Tesla, but also provided Tesla with significant capital at favorable interest rates and subsidized land for industrial zones, allowing Musk, who once complained of “production hell in the U.S.,” to to take advantage of China’s industrial manufacturing prowess. Beijing has also promised Tesla a favorable 15 percent tax rate through 2023.
Tesla is rapidly rising in China, where revenues grew 124 percent year-over-year in 2020, with more than 137,000 units sold and sales reaching $6.6 billion. This makes it the best-selling electric car on the market, according to the China Passenger Car Association. The Shanghai-built Model 3 is the star of the sales.
Just as Tesla was moving toward its goal of producing 500,000 cars a year, a “twist” came.
Last month, the Chinese military banned Tesla cars from military barracks and family quarters, citing security concerns about the vehicles’ cameras.
At the Shanghai Auto Show on the 19th of this month, a female owner wearing a T-shirt with “Brake Failure” on it made a scene, climbing on top of a Tesla and shouting “Tesla brake failure. After Tesla executives responded “no compromise on unreasonable claims”, Tesla was bombarded by China’s major official media and the Internet.
Xinhua News Agency criticized Tesla for “lacking sincerity” and called its executives “bullying presidents” with the title “Tesla, it’s time for you to reflect on the root of the problem”. Hu Xijin, editor-in-chief of the Global Times, said in a Weibo post that the Tesla incident was meant to be understood by foreign companies in China and “accurately comprehended”.
Robert Spalding, a former U.S. Air Force brigadier general and senior fellow at the Hudson Institute, said the Tesla case is exactly the script the Chinese Communist Party has used many times. “They wait for companies like Tesla to successfully establish themselves in China, wait for everything to be handed over to them before the factory can start operating, and then they start putting pressure on the company. Eventually, they will make sure that Tesla will not succeed in China.”
In the face of the overwhelming Chinese media recriminations, Tesla has reversed its usual tough PR stance in China. At a high-level Chinese economic forum in March, Tesla CEO Musk made a statement to China that Tesla would not engage in espionage or the company would be shut down.
After the female owner’s disturbance, Tesla issued a series of statements, from “no compromise” on the 19th to “apology and self-examination” on the 20th. By the evening of the 21st, Tesla said it was “cooperating with the regulatory investigation”. Some commentators say that Musk is increasingly like the recent Jack Ma’s tone.
Zach Cooper, a senior fellow at the American Enterprise Institute, believes Tesla’s “softening” is a common phenomenon for private companies operating in China, with the local “Alibaba and Jack Ma not immune.” “To achieve significant results in the Chinese market …… political statements (in China) must be made and supported. This is a serious problem.”
Using Anti-American Sentiment to Promote Inflection Points and Advance Local Electric Vehicles?
The twist in Tesla’s China story coincides with the tightening of multiple local competitors’ entry into the world’s largest electric vehicle market.
China’s State Council released its “New Energy Vehicle Industry Development Plan” in late 2020, calling for a move from “a large auto country to a strong auto country,” and “insisting on a purely electric-driven strategic orientation.” Through government incentives and subsidies, the government hopes that electric vehicles will account for one-fifth of all vehicle sales by 2025.
Numerous Chinese EV competitors are already targeting the huge domestic market. They include U.S.-listed Nio, Xpeng and Li Auto, as well as Zeekr, the premium electric car brand of European Volvo owner Geely. technology groups such as Huawei, Xiaomi and Baidu have also joined in as partners with traditional automakers.
These homegrown electric car brands bucked the sales trend last year and quickly raised more than $1 billion in funding after going public. Although sales are not as high as Tesla’s, all are fast-growing and ambitious competitors.
Cooper believes that market players will surely push the government to adopt protectionist policies against them. “I absolutely believe they are doing that. Other cases in China tell us that the Chinese government will intervene very forcefully at the behest of market participants.”
Yu Maochun believes that the Chinese Communist Party is targeting Tesla at this point in time, “no doubt to squeeze American companies through officially controlled anti-American xenophobic public opinion and psychology.” Yu Maochun noted that this was done for a variety of reasons: including “Tesla’s phenomenal success in China, its advanced technology and its close involvement in the U.S. space program.”
Musk’s aviation technology may be the ultimate goal
Elon Musk is the CEO of both Tesla and manned aerospace manufacturer Space X. And NASA and the Department of Defense are its most important customers. about two-thirds of NASA’s launch missions are handled by Space X.
Space X also plays an important role in the U.S. national security system. Last October, Space X was awarded a major Pentagon contract worth $149 million to supply parts of the military’s missile warning system.
“I’m very concerned that Space X will end up being controlled by the Chinese Communist Party,” Spalding said. “The Chinese Communist Party is always looking for opportunities to influence something, to seek leverage. For Tesla, that’s the stock price.”
“(Tesla’s) stock price depends heavily on sales in China, so the CCP knows they can influence Tesla by putting risk on the stock price.” In this case, “Tesla has no choice and will do what the Chinese Communist Party wants it to do.”
According to Yu Maochun, the CCP’s wishes include “sharing proprietary technology and knowledge, prohibiting the movement of funds out of China, limiting Tesla’s market share in China, and potentially requiring the company to reveal national security secrets in other business with the U.S. government (such as SpaceX).”
Last year, former Republican U.S. Sen. Cory Gardner (R-CO) proposed to introduce a legislative proposal to investigate whether NASA contractors are making money from China. Focusing on Space X, Gardner said that China, in its space competition with the United States, may “try to adopt U.S. intellectual property and innovations and force the transfer of those technologies through purchases or market access agreements.” Because of this, Gardner said, “the U.S. is now essentially complicit in pushing China to make progress in aerospace.”
However, Cooper of the American Enterprise Institute believes that concerns about the transfer of aerospace technology may be overblown. “Musk’s contract with Space X must be information-limited because Space X’s strong backer and main customer is the U.S. government. … Also, copying Space X is a challenging and systematic endeavor that several tech companies have recently tried to emulate… I don’t think Space X can be easily replicated by stealing bits and pieces of technology.”