Tesla’s China problems continue – at least until there is China production

Call toll-free 755-9999 for immediate delivery - of the Model S

Call toll-free 755-9999 for immediate delivery – of the Model S – Picture by Carnewschina

Tesla plans to localize production and engineering in China, CEO Elon Musk told China’s state-owned news agency Xinhua today. When Tesla’s Elon Musk visits a foreign country, he usually drops a hint of building a plant there, probably hoping that the locals go as gaga as the governors of U.S. states. Musk arrived in China to speak at the Boao Forum, China’s answer to Davos. Localization would be possible in three years, Musk said. He wisely did not say it will happen in three years. It won’t.

AFP helpfully advises that “foreign automakers must set up joint ventures with Chinese partners in order to produce and sell cars into the domestic market.” As mentioned before, the road to that joint venture can be long and treacherous. One needs a joint venture partner, that’s the easy part. The hard part is to get the stack of approvals by various Chinese government entities. That process alone can and usually does take years. Just as a for instance, rumors of domestic production of Infiniti appeared in 2011, production finally started late last year. That was for Infiniti, a brand of Nissan, Japan’s largest player in China, who has a strong joint venture with Dongfeng, owned by China’s central government.

Musk said Tesla wants to wait with Chinese production until its ample capacity at home is exhausted. That could be a while.  The trouble with the approval process is that you really don’t want to start it until you are fully committed. While the process runs – did we mention it can run for a while –  one cannot re-apply with another joint venture partner. Should Toyota still maintain a minority interest in Tesla by March 31 (we doubt it) this can be used against Tesla. Subaru was not approved because TMC has a minority interest in the Fuji-owned carmaker.

With EVs, there is another, even thornier problem. The Chinese government does not want foreign EV brands to be produced in-country. EV JVs are possible, but the car must be sold under a Chinese brand, owned by the JV, and the tech must be owned by the JV also. As the rules go, production of a Tesla-branded EV in China will not be allowed. Unless the rules change, the only way to make a Tesla EV in China is to sell Tesla Motors to the Chinese. (Don’t get your hopes up. The highest amount paid was $1.5 billion for Volvo.) If you don’t believe me, go waste your time looking for a foreign-branded EV being produced in China. Elon Musk was used to getting money from governments. In China, it was the other way until recently. Now, officials get shot if they take money, which made the approval process even slower.

A few days ago, Chinese media reported that Tesla has been included in a special license plate program in the southern city of Shenzhen. The report caused much elation among TSLA bulls. Then, the stock dropped like a rock. Carnewschina looked into the gory details. Shenzhen limits annual license plates to 100,000. Of those, 80,000 are for gasoline-powered cars, and 20,000 for EVs. Says Carnewschina:

“Unsurprisingly, demand for license plates for petrol-powered cars far exceeded supply and a monthly lottery started in January. Unsurprisingly again, demand for license plates for electric cars was much lower than supply, with only 3% or 600 licenses allocated to car buyers.”

Unsurprising as it may be to Carnewschina (a similar program in Beijing had the same effect – a run on ICE plates, EV plates left untouched) it may come as a shock to Tesla boosters. Then, there is another interesting item. Says Carnewschina:

“Whether this will mean much for official Tesla sales in Shenzhen is not sure. Tesla only has a single store in the city where sales have been slow from the beginning. The company also battles an aggressive gray market (parallel import), always a big problem down south, where brand new Model S cars are offered below market price. Some sources even say the gray market sells more Teslas than Tesla.”

There is bigger and immediate trouble in China. Model S registrations in China were 260 in February, down from 469 in January, reports Bloomberg. Even worse, Tesla imported only 63 Model S to China in February after bringing in just 10 in January, the report says. Elon Musk said in January that Tesla will be just fine without China, and if this quarter is an omen, Tesla will have to write-off China until that elusive Chinese production will come on stream.