Tesla investors face many risks. One of the largest — and one of the least talked about — is China.
Tesla has an extraordinary relationship with the Chinese government. Thanks to this relationship, Tesla enjoys privileges and perks no other American company has received.
The question is how long the relationship will last. That question, in turn, is tied to national strategic interest as defined by the Chinese government.
If the Chinese government decides it has gotten what it wants from Tesla — or that strategic interest favors playing hardball, rather than continuing to offer favors — things could go bad very quickly.
And to get a sense of how ugly a soured relationship with the Chinese government can be, just ask Jack Ma, the founder of Alibaba and Ant Financial group — or the institutional investors who stand to lose billions as a result of the scuttled Ant Financial IPO.
We explained the Ant Financial situation on Nov. 11 in a TradeSmith Daily titled, “The Chinese Government Killed the World’s Largest IPO.”
It would not surprise us if something comparably nasty happened to Tesla.
The topic is timely because, shortly before Tesla’s big Bitcoin reveal, a slightly alarming piece of news came out of China. “Tesla Summoned by China Regulators Over Quality, Safety Issues,” Bloomberg reported on Feb. 8.
“Authorities including the State Administration for Market Regulation held talks with Tesla’s Beijing and Shanghai units,” said Bloomberg, “after customers complained of problems including abnormal acceleration and battery fires… Tesla was asked to improve internal management, comply with Chinese law and regulations and protect consumers’ rights.”
Ah yes, the old tap on the shoulder from regulators. That is the treatment Jack Ma got, right before his $34 billion IPO was killed.
China’s electric vehicle (EV) market is large and sprawling, and it had more than 500 competitors at one time.
The strategic consensus is that the Chinese government welcomed Tesla into this fray to, first, serve as a best-practices example for homegrown EV makers to learn from and copy; and, second, to help ramp up local supply chains and make China’s EV ecosystem more robust.
Once those two purposes are served, the Chinese government may find it has no more use for an American automaker dominating the local EV sector.
Once China’s EV ecosystem is robust, and national champions like Xpeng and NIO have become strong, the Chinese government may decide to kick Tesla to the curb, or pose a “take it or leave it” ultimatum that involves nationalizing Tesla’s technology and intellectual property, or force Tesla into driving down prices until profit margins hit zero (as an alternative to taking huge losses).
In simple terms, what Tesla investors do not realize is that the Chinese government is a cat, and Tesla is a mouse. For the moment, the cat is content to let the mouse have its cheese.
When that state of affairs changes, it won’t be good for the mouse.
What’s more, the tap on Tesla’s shoulder from China’s state regulators — who hold so much power they might as well be mafia bosses — suggests the cat is preparing to pounce.
A major setback in China, created by the Chinese government, would pose a severe threat to Tesla on multiple fronts.
First, it could mean the potential loss of one of Tesla’s largest EV markets (if not the largest, bar none); second, it could mean the elevation of a homegrown EV champion (like Xpeng or NIO) at Tesla’s expense, not just in China but globally; and third, it could mean a transfer of intellectual property and technology to some of Tesla’s fiercest EV competitors.
To fill in some backstory, Elon Musk is beloved as a kind of entrepreneurial folk hero by the Chinese people, and the Tesla Model 3 was the most popular electric vehicle in China for much of 2020. Tesla China sold 120,000 vehicles last year; the Model Y is heading into Shanghai production alongside the Model 3; and China-based Tesla production is expected to ramp up considerably.
All of this matters — a lot — because China is the biggest EV market in the world by a large margin, thanks to an aggressive, decade-plus push by the Chinese government to promote electric vehicles over internal combustion engine (ICE) vehicles.
In Shanghai, for example, the license plate registration fee for an ICE vehicle is $14,000, but EV license plates are free. The Chinese government also exempts most EVs from a 10% tax on new vehicles, and further offers hefty purchase subsidies to make EVs affordable to Chinese consumers.
In 2015, Tesla was importing American-made vehicles into China, and it wasn’t going all that well. They were only shipping a few thousand cars per year, and large gaps existed in Tesla’s knowledge of the local Chinese market.
But then, in the years that followed, Tesla saw the opportunity to make a sweetheart deal with the Chinese government.
As a result of the Trump administration’s tough-on-China stance, and the perception of unfair treatment for American companies doing business there, China was losing its appeal as a destination for investment.
Just as the Chinese government truly started worrying about the U.S.-China trade relationship, Tesla came knocking with its proposal to build vehicles in China.
Strategically, the Tesla deal offered big advantages to China on two fronts: It could serve as a high-profile example of an American company enjoying success and good treatment in China — which would help the U.S.-China trade relationship — and Tesla’s presence could help invigorate the local EV ecosystem, as previously explained.
In service to its own strategic interest, the Chinese government thus went to extraordinary lengths to make Tesla happy. In every prior case, foreign automakers had to do a joint venture with a local Chinese counterpart and couldn’t own more than 50% of any China operation; Tesla was exempted from that rule.
Then, too, Tesla’s Shanghai plant was approved and built in record time, relative to the normal timeframe for companies to get regulatory approval, local and regional licenses, power and electricity hook-ups, and so on. As if that weren’t enough, Tesla also received billions in low-cost financing from state-owned Chinese banks, and Tesla vehicle purchases were made eligible for government EV subsidies.
All in all, Tesla had received just about every favor and fast-track initiative one could think of by the time the Tesla Shanghai plant broke ground in 2019. There was also a two-way flow of mutual respect and admiration: Elon Musk declared that “China rocks” in a podcast interview, and a local official offered Musk permanent China residence.
All of this sounds great, until investors remember what happened to Jack Ma — another entrepreneurial folk hero who seemed to have the blessing of the state.
Everything turned up roses for Ant Financial and Alibaba, until the day it suddenly didn’t.
The reason we anticipate a comparable turning of the tables for Tesla — besides the aforementioned tap on the shoulder from regulators — is because the reason for Tesla’s super-favorable treatment is clear, and the natural incentive to reverse that treatment is also clear.
When the cat decides it is more strategically advantageous to kill the mouse, or terrorize it with harsh demands, the picture for Tesla’s China operations could change instantly. Again, we’ve already seen a shocking version of this; Jack Ma could tell you about it, were he still talking.