Tesla May Get Screwed Over In Deal To Build Factory In China

Tesla risks becoming just another super luxurious toy in China as talks between officials and CEO Elon Musk on a factory deal start to crumble, according to a Wednesday report from Bloomberg.

The fast-moving electric vehicle market is quickly leaving the California-based automaker’s chances of entering China in the dust, the report notes. Automakers are catching up with Tesla and hurting the company’s chances of obtaining a sweetheart factory deal in the communist country.

“Tesla has no strategic path,” Yale Zhang, managing director of the Shanghai-based consulting company Automotive Foresight, said in a memo Tuesday night. “It has the halo of Elon Musk, and its products are slightly ahead of the competitors, but the others—especially the Chinese EV startups—are catching up rapidly.”

Tesla said last year that it was working with Shanghai’s government to assemble cars, but the deal is on ice because the two sides can’t agree on the factory’s ownership, the report noted. Tesla wants to own the factory outright, but China wants the company to enter a joint venture with a Chinese company.

Failure to forge a deal could seriously damage Musk’s mission to make inroads in the country. Tesla sells cars in China, but every car is slapped with a 25 percent import tax, dramatically increasing the car’s price. A Tesla Model X made in the U.S. and shipped to China, for instance, costs about $132,000, allowing local electric car makers to freeze Musk out of the communist nation.

Tesla sold 14,883 vehicles in China. The company’s sell numbers rank 10th behind leader BAIC Motor Corp. affiliate, Beijing Electric Vehicle Co., which sold 102,341 cars. Musk’s company claims it currently has 31 retail stores in the country, but without a deal Tesla would be relegated to a niche market.

Securing a factory could be the least of Tesla’s problems in China, which has the world’s largest electric vehicle market. Consulting firm LMC Automotive estimates that nearly 300,000 electric cars will be sold in China in 2017, while the rest of the world has sold combined total of 287,000. Their dominance in the market is due almost entirely on China’s massive subsidies to green energy companies.

Tesla is heavily dependent on subsidies for survival, but the subsidy train could end sooner rather than later, as China is already struggling to pay out billions of yuan in subsidies to clean energy companies.

The total shortfall by 2020 will be $30.2 billion, a dramatic increase from $7.5 billion last year, Dongming Ren, director of the National Development and Reform Commission’s Energy Research Institute, said at an industry conference last year. Electric vehicle sales plummet wherever subsidies and tax credits for ownership are nixed.

Tesla cars registered in Hong Kong, for instance, tumbled from nearly 3,000 in the month of March to zero in April after the government cut a tax break for electric cars April 1, according to a report from The Wall Street Journal.

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