In his second quarter 2018 shareholder letter, Tesla CEO Elon Musk gave us some details about Tesla’s plan to start production in China.

He wrote, ” Initial capacity is expected to be roughly 250,000 vehicles and battery packs per year, and will grow to 500,000,with the first cars expected to roll off the production line in about three years.”

Three years. 

But we were hit with news last week that Tesla wants to start production in China as early as 2019.

Three years to less than a year. 

Elon Musk would have had no idea that his company would be starting at lukewarm sales in China for the next few years when he made a quick 3 day visit to China in July.

But that’s exactly what happened. Trump slapped tariffs on $250 billion worth of Chinese goods – accusing the country of Intellectual property theft and unfair trade practices that widen trade deficit. 

China responded by increasing duty on $110 billion worth of American exports and made sure to throw US Auto exports into the mix. It was an easy decision for China.

 
“The United States imported $1.6 billion in new and used cars made in China last year, roughly six times less than US auto industry exports to China, according to the Census Bureau. “- CNN

Tesla, already playing hide and seek with margins, had no choice but to transfer the additional duty to the customer. The company increased price by 20% in July. 

Revenue plunged by nearly 27% in the third quarter, compared to last year – from $563.56 million in Q3-2017 to $409.30 million in Q3-2018. 

Tesla reduced prices by 12% to 16% in late November, but Model S and Model X still cost a lot more than what they did in May. 

If there ever was a great time for President Trump to play hardball with China then that time would be now. The mid-terms are over and his re-election drama is nearly two years away. As long as the economy is doing well, which it is, Trump will continue his trade war-games with China. 

That’s great news for politicians, but bad news for US Auto companies exporting to China. 

As evidenced by the steep revenue correction in the third quarter, Tesla Model 3s market in China will be many times smaller than the actual, if it is forced to compete in a different segment due to additional duty.

Tesla can focus its attention on other International markets to offset China. But Tesla the number one electric car maker in the world, cannot give up the world’s number one electric car market. That will be the equivalent of giving a free pass to your competition.

According to this Bloomberg report, Tesla plans to start production in China in the second half of next year. 

Building factories not only costs money but it takes time. Tesla needed three full quarters to increase Model 3 production from 0 units per week to more than 2,000 units per week. 

“In April 2009, BMW Brilliance, a joint venture between BMW and Brilliance Auto, announced that it would construct a second automobile assembly plant in China. Construction of the plant began in Shenyang in June 2010, with a planned cost of US$73.53 million and a production capacity of 100,000 units.

Production at the plant began only in May 2012. “

Tesla’s plan to start local production in China next year is extremely ambitious. The company has made it clear that they want to build only Model 3, not Model S and Model X in China and their recent experience in constructing a new assembly line, “the tent”, in record time will certainly help them. 


Tesla GA4: Model 3 assembly line built inside a tent. [Credit: CBS/YouTube]

“Amazing work by Tesla team. Built entire new general assembly line in 3 weeks w minimal resources. Love u guys so much!,” tweeted Elon Musk after Tesla built a giant tent in June 2018 to house a new Model 3 production line. 

Three weeks.

But building a new line right next door is easier than building one thousands of miles away. The new Chinese facility will need a lot of time before it can match its US counterpart.

But the good news –  any output from the new factory will help the company extract concessions from the Chinese government and maybe that’s what Tesla is after.

Just to get started, however small it might be.