NEW ENERGY: Tesla Closes in on China Plant, Shanghai in Sight?

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Bottom line: Tesla will announce a joint venture production facility in Shanghai within the next 1-2 months, and could see its China sales pick up sharply after its more affordable Model 3 reaches the market next year.

Telsa eyeing China home in Shanghai?
Telsa eyeing China home in Shanghai?

Just a week after Disney (NYSE: DIS) launched its newest theme park in Shanghai, media are saying that new energy car superstar Tesla (Nasdaq: TSLA) is also eyeing China’s commercial capital as the location for a new production base costing up to $9 billion. We should note from the start that the potential partner mentioned in the reports, the Shanghai government-owned Jinqiao Group, has denied the signing of a memorandum of understanding (MOU) for such a deal. But in this case I trust the source of the story, Bloomberg, more than the Chinese officials who have a track record of denying reports that later turn out to be true.

This particular investment plan has been in the headlines for much of this year, though Tesla has been quick to always say that it will only make such an investment if it can find the right partner and market conditions justify such a move. A major breakthrough appeared to be near last month, when a senior Tesla executive met with a high government official in charge of the new energy car sector and the pair later released photos of their meeting. (previous post)

All that said, let’s review the latest developments that include both details of the potential plan and also Jinqiao Group’s denial. According to the Bloomberg report, Tesla has signed an MOU to build a manufacturing plant in Shanghai’s Pudong New District, making the city the front-runner to host the long-discussed production base. (English article; Chinese article)

Under the plan, Tesla would provide half of the investment for the plant, or up to 30 billion yuan ($4.5 billion) of the total cost of around $9 billion. Jinqiao Group would provide the other half. Other places that are still vying for the plant include the interior city of Hefei in Anhui province, and the city of Suzhou about an hour’s drive from Shanghai.

The Bloomberg report cites a representative of one of Jinqiao’s listed units saying that the parent company hasn’t signed any MOU or other documents about a Tesla joint venture factory. (English article; Chinese article) The fact that Bloomberg decided to run its article despite the denial leads me to believe that a deal is really happening in Shanghai, though perhaps there’s no actual signed MOU just yet.

Aggressive Suitor

The fact of the matter is that Shanghai is quite aggressive when it comes to courting cutting-edge famous brands like Tesla. The city just opened its state-of-the-art Disneyland last week, and the latest reports are pointing out that the reported new Tesla factory would be worth nearly twice as much as the $5.5 billion price tag for the Disney resort.

Shanghai has also been working aggressively to build up a charging infrastructure for electric vehicles (EVs), in a bid to jump-start Beijing’s stalled program to promote the industry. That program includes not only building charging stations throughout the city, but also working aggressively to get residential property management companies to permit apartment dwellers to install such stations in their parking spaces at home.

Tesla zoomed into China 2 years ago on a flood of positive publicity, fueled by Beijing’s emphasis on the technology and also the celebrity power of company founder Elon Musk. But it stumbled badly after that due to lack of infrastructure, poor marketing and also problems with China’s broader incentive program to promote the sector.

This latest move to localize production, combined with Tesla’s recent introduction of a more affordable model priced at $35,000, seem to indicate the company may be regaining some of the momentum it lost after its fast start 2 years ago. Accordingly, I expect we could see a formal announcement of the new joint venture in the next month or two, and the company’s China sales could pick up sharply when the new more affordable Model 3 becomes available here next year.

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