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To tap into a growing market for electric vehicles in China, Tesla is betting big on the region -- and executives talked up the company's efforts there on an earnings call this week.
Specifically CEO Elon Musk and Tesla's retiring CFO Deepak Ahuja emphasized their aims to get the Tesla Shanghai Gigafactory up-and-running this year, and to deliver U.S-made Model 3 sedans to customers in China immediately. Musk expressed concern that trade tensions between China and the U.S. could escalate, resulting in higher import taxes or tariffs, and other problems for Tesla.
Electric vehicle sales have grown more rapidly in China than other parts of the world, and already comprise about 4 percent of the substantial market there. The growth is thanks, in part, to a shifting array of federal and local incentives for electric vehicle makers, and subsidies for people who buy these cars in China. Tesla wants to establish a stronger foothold in this massive market, before the subsidies and incentives go away.
The industry ministry of China expects annual "new energy vehicle" output to rise to 2 million in 2020, and sales of 7 million new energy vehicles in China by 2025, representing about 20 percent of the overall autos market there.
Tesla faces serious competition from domestic Chinese companies like: the Warren Buffet-backed BYD; SAIC, which makes Roewe electric cars; and Geely, the parent company of Volvo. It also faces competition from foreign automakers that produce electric cars or hybrid, and already know their way around manufacturing in China, like Ford, Hyundai and Toyota.
Here are some of Tesla's biggest plans for China that execs outlined Wednesday's fourth-quarter earnings call, as transcribed by FactSet:
Funding the Shanghai Gigafactory:
"The purchase of the land is a 50-year lease with the government of China. So, it's not capex, but it's operating lease, and that shows up as the cash flow from operations. However, the capex that we will invest is our equipment, and we fully own it. So that will show up as capex. The plan, as we have indicated in the letter, is still to get funding for majority of that capital spending from local China banks. And we expect very attractive rates based on the dialogue we've had and there's a lot of interest." -- Deepak Ahuja
"Yeah. I mean, as a ballpark figure, probably something in the order of $500 million in capex to get to the 3,000-vehicle rate in Shanghai, ballpark figure. And as Deepak was saying, hooking up a very competitive debt financing in China really extremely compelling interest rates and so we do not expect that to be a capital drain on the company. " -- Elon Musk
Tesla's advantages in China:
"If you're in the automotive industry you understand how significant this is, but maybe it's not as obvious to everyone. Tesla has the first wholly owned manufacturing facility in China of any automotive company. So, this is profound. And we're very appreciative of the Chinese government allowing us to do this. I think it is symbolic of them wanting to open the market and apply and it farewells to everyone. I'd just say like an order of appreciation for the Chinese government in allowing us to do that. It's a very significant thing." - Elon Musk
On making batteries in Shanghai:
"We'll be making the module and the pack. So, it's really just production of cell supply. And you can essentially use any high-energy density, 2170 chemistry. We expect it to be a combination of cells produced at our Gigafactory in Nevada, cells produced in Japan and cells produced locally in China. And we feel confident of sufficient supply to hit 3,000 units a week." -- Elon Musk
Delivering a lower-priced Model 3:
"We need to bring the Shanghai factory online. I think that's the biggest variable for getting to 500,000-plus a year. Our car is just very expensive going into China. We've got import duties, we've got transport costs, we've got higher costs of labor here. And we've never been eligible for any of the EV tax credits. A lot of people criticize Tesla for being so dependent on incentives. In fact, for a company making EVs, we have the least access to incentives. It's pretty crazy. Because there's so many countries that have put price caps on the EV incentive which differentially affect Tesla. And in China, which is the biggest market for EV's, we've never had any subsidies or tax incentives for vehicles.
"So, it's difficult. Once a car is made there, it is eligible for that. That sounds like that's going to be reducing in China in the coming years. But really, bottom line is, we need the Shanghai factory to achieve that 10,000 rate and have the cars be affordable. It's important to appreciate, the demand for Model 3 is insanely high. The inhibitor is affordability. It's just that people literally don't have the money to buy the car. It's got nothing to do with desire. They just don't have enough money in the bank account. If the car can – if we made it more affordable, the demand is extraordinary." -- Elon Musk
On how demand in China stacks up versus Europe:
"Our relationship actually with Europe and China is how do we get the cars made and on order such that it reaches customers before end of quarter and we don't have a massive number of cars on the order. That's our biggest challenge. It's not demand. It's how do we get the cars there fast enough...I mean, we're not even really trying, I should point out. Our factory is like right now only making cars for China and Europe. That's all it's doing with respect to Model 3. And our whole focus is okay, how do we get those cars made, get them on a ship as fast as possible." -- Elon Musk
On U.S.-China trade relations:
"We don't know what's going to happen with the trade negotiations. So it's very important to get those cars especially to China as soon as possible. We hope the trade negotiations go well, but it's not clear. But we need to get them there while there's sort of de facto sort of a truce on the tariff war. And demand gen is really not one of the things we're thinking about." -- Elon Musk
WATCH: Elon Musk says demand for Model 3 is "insanely high," but cost is too high