Tencent is the largest gaming company in the world, and one of the largest Internet companies as well. A recent investment made by Tencent holds great significance, not only for the company it invested in, Tesla Motors, but the possible easing of Tesla’s challenges in the Chinese EV market. The investment was to the tune of $1.8 billion, representing 5 percent of Tesla Motors.
Why is this a significant investment despite from several perspectives?
The obvious reason is Tencent’s clout in the Chinese business landscape. Now, as the fifth largest shareholder in Tesla Motors, Tencent is in a much better position to advise Musk of the best way to increase its gains in China.
Tesla’s start in China was not exemplary. It would have been a good story if Tesla had seen positive results from day one, but it was more a case of running aground and restarting than hitting the ground running. After struggling with sales in the PRC and a subsequent tripling of the market to $1 billion, China still contributes less than a quarter of what the US does to Tesla’s top line.
For the Chinese tech giant, Tesla is merely one of its many investments in forward-looking segments within the automobile industry. For example, Tencent invested almost $7.3 billion in Chinese car-hailing company Didi Chuxing between December 2014 and June 2016. It has also invested significantly in NAV and HERE, both mapmaking companies that cater to the automobile industry. It has a $150 million investment in Lyft as well, in an investment round that also saw Alibaba and Didi Chuxing (at the time, Didi Kuaidi) join the fray.
For Tesla, however, it is a significant partnership because Tencent has enough government backing in China to tip things in Tesla’s favor. Together with Alibaba and Baidu, Tencent forms a cartel of conglomerates that control several aspects of China’s technology landscape across multiple industries: e-commerce, social media, gaming, digital payments, artificial intelligence, cloud computing and many others.
Moreover, China has been very aggressive on EVs and battery development, which allowed them to overtake the United States in terms of total EV sales in 2015.
The Chinese government is now tracking a 10x increase in EV sales in the next decade or so. To that end, they’re offering as much as 60 percent of the cost in subsidies when you buy an electric vehicle.
All that points to the undeniable fact that Tesla needed a Chinese partner to make it work. Demand for the Model 3 is very strong in China – second only to the United States, if you go by initial reservations – but the domestic taxation element makes sustainable sales growth impractical at best.
And that’s why Tencent being a shareholder in the company – albeit a passive one – is an extremely positive development. Not only for Tesla as a company as it invests heavily to bring out the Model 3, but China as a market and EVs as an industry.
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