Will Tesla’s Next Gigafactory be in China?

Tesla has been taking baby steps towards setting up its manufacturing facility in China. In June 2017, Tesla entered into exploratory talks with the Shanghai municipal government. But the talks didn’t result in concrete action as Chinese policy required Tesla to partner with a Chinese manufacturer and own no more than 50% of the joint venture.

But China changed its direction this year.

According to National Development and Reform Commission (NDRC), “China will scrap (ownership) limits on companies making fully electric and plug-in hybrid vehicles in 2018, commercial vehicle makers in 2020 and lift restrictions on the wider passenger vehicle market by 2022.”

So, here is the Why, When and How Tesla can move to China.

The Background

China is the world’s largest EV market because the Chinese government is aggressive about the transition from gasoline cars. Not because of their love for all things green or because of their hate for oil, but because their cities are choking on pollution and also because China is staring at a 500 billion dollar oil bill by 2020.

“China’s government has announced that any automaker producing or importing more than 30,000 cars in China must ensure 10 percent of them are all-electric, plug-in hybrid, or hydrogen-powered by 2019. That number will rise to 12 percent in 2020.”

12% of a 25 million units per year market is – 3 million units. That’s a lot of distance to travel from the 777K, new energy vehicles sold in the country in 2017.

So, it was not a big surprise to see China relaxing its stance about allowing foreign auto companies making electric and plug-in vehicles to have full ownership of their entity in China.

China ticks all the boxes for Tesla.

A large but growing EV market and a government with genuine need to support such growth.

 Chinese Love Tesla

According to Tesla’s Asia Pacific head, Ren Yuxiang, Tesla Model 3 reservations in China were second only to the US.

Thanks to 25% import tariff and other charges, Tesla Model S starts at $121K and Tesla Model X starts at $126K, a cool 50% more than what it costs in the United States.

But despite the pricing disadvantage Tesla tripled its sales in 2017, selling more than 16,500 units in the country. (according to my own calculations)

If Tesla can bring down the price, volume could easily surpass US numbers. The best way to bring down the the price is by building cars in China.

Tesla has now taken a small but concrete step

Within a month after China announced policy changes in April this year, Tesla’s Hong Kong division registered a wholly owned company with a paid-up capital of $15.8 million, clearing the way for Tesla to handle R&D on electric cars, auto parts, batteries and solar products.

Elon Musk revealed Tesla’s plans for setting up a Gigafactory in China in the company’s second-quarter 2018 earnings call

“It has to be later this year. Maybe next quarter, but not later than fourth quarter for Model Y. We also expect to announce the location of a Tesla Gigafactory in China soon. In the future, all Gigafactories will include vehicle production. So, right now, vehicle production and battery production, like battery production and motor and power electronics and charger production are at Giga, and then, we have our Fremont car factory. But future Gigafactories will all incorporate vehicle production.”                                                               Elon Musk, Q2-2018 Earnings Call


Tesla is running out Space

As of now, Tesla operates three factories in the United States

  • Auto factory in Fremont, California
  • Gigafactory 1 (battery plant) outside Reno
  • Gigafactory 2 (PV cell factory, Solar panels) Buffalo, NY

The auto production plant in Fremont, Cali. was a jointly operated facility by GM and Toyota, known as New United Motor Manufacturing Inc. (NUMMI). Tesla bought this facility in 2010 for $42 million.

At its peak, NUMMI manufactured 428,633 units (in 2006), an average of 8,243 units per week.

Tesla is on the verge of hitting 5000 Model 3s per week production and they already have the capacity to build 2000 Model S and Model X per week, a grand total of 7,000+ units per week. Tesla Fremont facility is very close to max capacity.

Tesla needs a new factory to build more cars.

With the case for the next factory stronger than ever, where will Tesla build it? 

  • Do you take the easy to start option and further expand production in United States beyond 400K?
  • Or do you take some risk and pick another country?
  • Will it be Europe or China or both?

That brings us to our next question.

Where is the money going to come from?

At the end of first quarter of 2018 (March 31,2018), Tesla had $2.665 billion cash on hand, after burning through $702.2 million in three months. It’s highly likely that Tesla will close its second quarter with little over a billion dollars in hand.

As I explained in my earlier article, Tesla does not need money for surviving this year, but needs money for expansion. With plans for Model Y, Tesla-Semi and Roadster in place and the need for a new factory looming in the horizon, Tesla needs to hit the capital markets at some point.

Will it be this year or the next?

If you are going to raise money, you want to do it from a position of strength, not from a position of weakness.

Considering the current debt load, Tesla will be looking to strengthen its balance sheet through common stock offering instead of piling more debt. It could be a mix of common stock, convertibles and bonds, but Tesla will prefer to keep away from debt.

Tesla stock price is up by just 10% since the start of the year but Tesla will want to move it as high as it possibly can. If Tesla breaches the 5000/week Model 3 production goal, the stock price will definitely move higher. But the odds of cash flow turning positive is still low and it will weigh down on the stock

With third quarter looking good in terms of increasing volume; expect Tesla to deliver 50,000 to 80,000 units during the quarter and also realize the full benefit of its 9% workforce reduction. The odds are quite high for Tesla to deliver record breaking numbers during the third quarter of 2018.

If Tesla is going to raise money,  fourth quarter of 2018 will be the best possible time and knowing Tesla, expect Model Y unveil to happen around that time, following the announcement of Gigafactory 3 or Gigafactory 3 & 4.

My preferred sequence will be China first, Europe (Germany) next and then United States.

Please take a look at Tesla in 1Page, to know more about Tesla’s history, performance, success and failures, financials and everything that you need to know about Tesla.