If you have not been hiding in a cave, you have certainly noticed that tensions between the US and China have been heating up. As recently as May, China planned to reduce import tariffs for many vehicles from 25% to 15%. Then tensions escalated, and in response to President Donald Trump's proposal to impose tariffs on $ 34 billion worth of Chinese goods, China beat tariffs on US products, including auto imports, and drove that 15% tariff 40 %. Now, the Trump government threatens to more than double and freeze the $ 200 billion in Chinese goods.
Tesla (NASDAQ: TSLA) has been negotiating for some time on the construction of a factory in China ̵
Problem and Solution
Apart from the tension of the trade, there is a reason why Tesla and China fit together in the sky. China has a massive and well-documented pollution problem. Decades of rapid economic expansion have made the country a world power, but also the world's largest emitter of carbon dioxide. In fact, China's "environmental census" has revealed that the number of sources of pollution – think of factories and the like – has risen from 5.9 million in 2010 to 9 million.
These pollution issues are a major concern of the government, and their response has been to push electric vehicles to strongly incentivize incentives to reduce emissions , China is already the world's largest market for electric vehicles, so what better region for Tesla, which burns cash at a frightening rate to accelerate its sales and get help on its path to profitability? For this reason, Tesla's recent preliminary agreement with Shanghai to build a factory there will be one of the biggest developments for investors in the next few years.
Why is the plant so important in China?
China is already an important part of Tesla's business. From 2015 to 2016, the company tripled its revenue of over $ 1 billion and doubled its revenue in 2017 to $ 2 billion – equivalent to 17 percent of Tesla's 2017 revenue. Here's the problem: Due to China's retaliatory tariffs on US Imports, including American cars, forced Tesla to raise prices for its X and S models by more than $ 30,000 in China. Tesla's hand was forced because it is still losing money and burning money and is therefore unable to absorb the cost of customs, but the increase will inevitably make the price tag inaccessible to some Chinese consumers
Fortunately, Tesla's Chinese assembly plant will allow the automaker to avoid these tariffs, even if it takes a few more years. Tesla plans a capacity of 500,000 vehicles per year for its second global assembly plant. In November, CEO Elon Musk said the company was around three years away from production. That still seems like a solid timeline.
China's sales of new vehicles, including plug-in hybrid, battery and fuel cell vehicles, registered 777,000 units last year and are expected to reach around one million this year, according to Automotive News . Here's the kicker: China's government is targeting 7 million such vehicles by 2025 already. This is a growth that is drooling Tesla investors. In the automotive industry, which is cyclical and capital-intensive, Tesla can not afford any uncertainty, as import tariffs vary between 15% and 40%. Therefore, building a factory in China is a breeze. It may be the time when Tesla turns from an unprofitable question mark to a global EV powerhouse. The big question now is: who will pay for it?
Daniel Miller has no position in any of the above values. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.