Elon Musk, CEO of U.S. electric car company Tesla, has always had a dream of China. He wants to build a super factory in China and attract consumers in the Chinese market with prices 65% lower than those in the US by reducing production costs, transportation costs, import tariffs, etc. In the past two years, Tesla has indeed been widely acclaimed in the electric car world with its rapid success story in the Chinese market.
In 2019, the Chinese government invited Tesla into China with extremely rare preferential policies in terms of sole proprietorship, loans, land use and tax payment, and it took Tesla only 168 days from obtaining permission to going into production. by the end of 2020, Tesla was firmly established in the Chinese market, with its market share reaching 21%, ranking first in China, and sales surging in the first three months of 2021. Musk’s China dream can be considered glittering.
If we follow the rules of market competition, Tesla can’t lose in China. In terms of overall competitiveness, no Chinese electric car company can compete with Tesla. But now it seems that the honeymoon between Tesla and the Chinese government has come to an end. Several incidents involving Tesla have erupted this year, from which we can see the signs. In particular, Tesla has recently been subjected to an organized national crusade in China over a brake incident. The Chinese Communist Party’s media was vicious, and patriotic fans were in hot pursuit. With the Guangzhou traffic restrictions and the military ban, Tesla’s life has suddenly become difficult.
Of course, Tesla will not be in immediate danger yet. China’s electric car industry has not yet grown up, and the Chinese government is not yet in a good position to completely flip-flop with Tesla. This is mainly because, without central financial subsidies, Chinese electric car companies are still the ones who can’t get up. Some domestic analysts sarcastically say that government subsidies hold up the “half of the sky” of domestic new energy vehicle companies, without government subsidies, what do they have left?
China’s financial subsidies for electric vehicles began in 2009. As of 2018, the central and local governments have subsidized about 160 billion yuan. The central government originally planned to reduce subsidies to manufacturers in 2019 and end them in 2020. However, once the news broke, production and sales immediately dropped, with negative growth for the first time in 2019. This made it difficult to achieve the original target of 25% of electric vehicles by 2025. The Chinese government then urgently decided to extend the subsidies until 2022 to boost companies.
Relying on financial subsidies, Chinese companies are bending over backwards to try to make Chinese electric vehicles rapidly localize their components. This is what the Chinese government asked of Tesla when it gave it the concession. Tesla, as the world’s leading electric vehicle company, has a complete industrial chain, including ten parts such as powertrain, electric drive system, charging, chassis, body, other components, central control system, interior and exterior, etc. There are more than one hundred direct and indirect suppliers. Most of Tesla’s core technology suppliers come from Japan, the United States and Europe, while most of the Chinese domestic enterprises entered the supply chain system earlier as secondary raw material suppliers. For Tesla to lower the price of the Model 3 to $35,000 and completely penetrate the Chinese market, it will have to rely on Chinese factories and Chinese suppliers. According to Tesla executives disclosed at the end of 2020, its localization rate target has been largely achieved.
Paradoxically, the higher Tesla’s localization rate is, the worse it is for Tesla. This is because once the localization rate reaches its target and Chinese EV companies grow up, the Chinese Communist Party will unload at any time. On March 31, 2021, U.S. Trade Representative Katherine Tai’s “National Trade Report on Foreign Trade Barriers 2021” noted that in the “Made in China 2025” plan developed by the Chinese State Council in May 2015 The goal is to 1) ensure that Chinese companies develop and acquire their own technology, intellectual property, know-how and brands through various means; 2) replace foreign technologies, products and services in the Chinese market with Chinese technologies, products and services; and 3) capture a larger share of the global market. Does the supremely clever Musk also see the Chinese substitution strategy clearly?
It is difficult for a foreign company with technology, management, innovation and rules to compete with a government that does not play by the rules, but is extremely ambitious, and a Chinese company that lacks technology and innovation and will do anything to bend the rules. Musk’s softness to the Chinese government will not save his China dream, because what is happening now and what is about to happen was already implicit in his first day in the Chinese market. While Tesla will have a scare in the near term, it’s hard to be optimistic in the long term.
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