Tesla could benefit from looser restrictions in China, says auto analyst

Key Points
  • Beijing may remove caps on foreign ownership of electric-vehicle ventures in China.
  • The most significant impact of any change in regulation could be the entry of foreign competitors like Tesla, according to James Chao, the managing director for Asia Pacific at IHS Markit.
China to remove cap on electric vehicle ventures this year

China may make it easier for foreign electric car companies to operate in the country, and new competition could affect homegrown vehicle manufacturers.

The Chinese government claimed this week that it will remove foreign ownership caps for electric vehicle ventures this year. Beijing currently limits the size of the stake a non-Chinese company can hold in a joint venture.

The move, while significant, is unlikely to have a huge effect on already established joint ventures in China, according to James Chao, the managing director for Asia Pacific at research firm IHS Markit.

Chinese companies already operating with partners from outside China have "developed a management structure and operational cadence with their joint venture partners that frankly works, and they'll continue with that," Chao told CNBC's "Capital Connection."

Tesla wins?

The most significant effect of looser restrictions from Beijing would stem from the entry of foreign competitors such as Tesla, Chao said.

The American electric vehicle pioneer last year started negotiations for a factory in China, but failed to reach an agreement because the government didn't want Tesla to fully own the facility.

A factory in China would let Tesla avoid import tariffs.

"Electric vehicle-makers like BYD and maybe the new entrants as well — the new Chinese entrants that is — will be affected by potentially a Tesla or others that decide perhaps to produce their vehicles in China," Chao said.

A Tesla Motors official store showroom in Wan Chai, Hong Kong on April 7, 2018.
Miguel Candela | SOPA Images | Getty Images

That said, any move to lift caps on foreign ownership will serve its interests, by serving as a carrot to the U.S. amid trade tensions between the countries.

"On the one hand, this is a bit of a carrot," Chao said. "On the other hand, domestically, Chinese regulators – the Chinese government – wants its local automakers to become more competitive, and this is one way to do it."