The front of a Tesla building. Justin Sullivan, Getty Images

Tesla’s China Dream Threatened by Standoff Over Shanghai Factory

China's central government says the plant must be a joint venture with local partners, while Tesla wants to own the factory completely, sources say.

Tesla Inc., the biggest-selling electric carmaker in the U.S., is in danger of being relegated to an expensive niche in China because Elon Musk can't clinch a deal to open a factory there.

More than seven months after Tesla said it was working with Shanghai's government to explore assembling cars, an agreement hasn't been finalized because the two sides disagree on the ownership structure for a proposed factory, according to people with direct knowledge of the situation. China's central government says the plant must be a joint venture with local partners, while Tesla wants to own the factory completely, the people said, asking not to be identified because the negotiations are confidential. Currently, all foreign automakers must partner with Chinese companies in order to manufacture locally.

Tesla's sluggishness in starting local manufacturing means it's fumbling a chance to capitalize on China's hard sell for new-energy vehicles, including EVs, plug-in hybrids and fuel-cell vehicles. President Xi Jinping's administration wants to scrub notorious air pollution and reduce dependence on imported oil, and it's doling out billions of dollars in subsidies to entice consumers away from gas guzzlers.

“It’s a market they need to get a foothold in,” said Jeffrey Osborne, a New York-based analyst for Cowen & Co.  with an underperform recommendation on Tesla.

Tesla declined to comment on its negotiations with the Chinese government over local production. The Ministry of Commerce, National Development and Reform Commission, and the Shanghai Economy and Information Commission—which are all involved in the deliberations—didn't reply to questions faxed at their requests.

The disagreement doesn’t mean a deal won’t be reached in the future. Tesla currently sells cars in China, but an import tax of 25% catapults the sticker price beyond the means of most consumers. A Tesla Model X made in the U.S. and shipped to China costs about 835,000 yuan (US$132,000), providing openings for cheaper models from domestic rivals such as BAIC Motor Corp., Warren Buffett-backed BYD Co. and startups NIO and Byton.  

Tesla said in June it was working with the Shanghai government to explore local manufacturing, and it expected to more clearly define production plans by the end of 2017. The company said it needed to have local factories “to ensure affordability for the markets they serve.”

In November, Musk said during an earnings call the company was about three years away from starting production in China—meaning 2020 at the earliest. “Don't set your watch by this,” he said. 

Shares of local suppliers subsequently fell.

And the waiting game for Palo Alto, Calif.-based Tesla may not end soon. Speaking with analysts after earnings were announced Feb. 7, Musk, the chief executive officer, didn't talk about China, and the company didn't mention its China plans in the update published with those results.

“Tesla has no strategic path,” said Yale Zhang, managing director of the Shanghai-based consulting company Automotive Foresight. “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.”

In the U.S., Tesla accounted for the majority of the 104,471 battery-powered cars, according to data compiled by Bloomberg. In China, however, Tesla sold 14,883 vehicles, accounting for just 3% of the nation's battery-powered EV sales of 449,431 units. Tesla ranked 10th behind leader BAIC's affiliate, Beijing Electric Vehicle Co., which sold 102,341 cars, according to Bloomberg Intelligence. BYD sold 33,020 for third place.

Tesla said it currently has 31 retail stores across China and more than 1,000 Superchargers, which can recharge a model in 30 minutes.

Sales of new-energy vehicles—a category that includes battery-powered, plug-in hybrid and fuel-cell automobiles— reached 777,000 units last year and could surpass 1 million this year, the China Association of Automobile Manufacturers estimated. The government's target is 7 million vehicles a year by 2025.

Buyers say the generous handouts are working. Lily Li, a 36-year-old office worker from Shanghai, bought a BJEV car even though its driving range falls short of Tesla vehicles. Li paid less than 100,000 yuan for the EV160 model after incentives.

“I am very into Tesla for its battery technologies, but I can only afford a Tesla if its price falls below 300,000 yuan,” Li said. “It will take years before that happens, so I had to make do with a domestic EV.”

BYD's top seller—the e5—costs 129,900 yuan after subsidies from the central government, according to its website. NIO and Byton also beat Tesla on price. NIO's ES8, with a range of 355 kilometers (221 miles) on a single charge, sells for 448,000 yuan ($71,000).

Byton, a Nanjing-based company started by former BMW AG executives, unveiled a planned $45,000 SUV at last month's CES in Las Vegas.

“It’s going to be a much narrower lane for Tesla,” said Bill Russo, CEO of Shanghai-based Automobility Ltd. “If you are double the price of the competition, then you are always going to be struggling.”

By Bruce Einhorn, Yan Zhang, Keith Zhai, Ying Tian and Haze Fan

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