Funding for Tesla’s China factory not secured

Angels cry as Tesla breaks ground in China – Picture courtesy Caixin

In Tesla’s Q4 2018 earnings call last week, Tesla CEO Elon Musk gave the impression that Tesla’s planned factory in Shanghai China won’t be “a capital drain on the company.” If you listened to the call, or read the transcript, you probably walked away thinking that the land is a cheap rental, and that the factory can be built for next to nothing. You also probably think that funding for the factory is secured. None of this would be true.

Let’s refresh our memory and review the pertinent part of the call, courtesy of the transcript compiled by Seeking Alpha.

Let’s start with a minor nitpick. The land does not come from the “Government of China,” the land was bought from the Municipal Government of Shanghai. It is not China’s central government that is throwing its weight behind the deal, as it was made to sound, it is Shanghai which is dying to attract an anchor tenant for a swampland industrial development that heretofore has been shunned otherwise.

Tesla doesn’t pay monthly rent as one may assume, Tesla paid 973 million yuan ($140 million) for a 50 year lease on an 864,885 square meter plot in Shanghai’s Lingang district, as China’s financial magazine Caixin reported. The average price for industrial land in Shanghai stood at 2,601 RMB for the sqm last year. At 1,152 RMB, or $162 for the sqm, Tesla did not overpay, but considering the lack of attractiveness of the plot, it also didn’t get a sweetheart deal.

Now to the $500 million Elon Musk said the plant would cost. I was asked on Twitter what a factory normally would cost to build. I gave my standard answer that the usual 250,000 units per year car factory usually is priced from $1.5 billion on up. Tesla’s factory should cost a little more. Elon Musk has two favorite numbers, one being 420, and the other 500,000. In tune with the latter, the Shanghai factory was said to be good for 500,000 units per year. Reuters figured the cost for that would be around $2 billion, which sounds about right for the first phase of a car factory with capacity for further growth.

According to China’s Caixin, Musk’s $500 million number is way off into the stratosphere.

After talking to a number of Chinese banks approached by Tesla, Caixin now writes that “Tesla Inc. is seeking loan bids to fund its $5 billion Shanghai factory.” Ooops. If correct, that number would be off by a factor of 10 from what Musk and his departing CFO Deepak Ahuja claimed last week in front of financial analysts.

Also, funding for the new Chinese plant is far from secured. Caixin has learned that “a consortium made up of several lenders has been formed to provide loans to the factory.” Banks are “rushing to get in” on the deal, a city official is quoted. However, says the paper, the consortium doesn’t even have a leader yet, and “negotiations are still ongoing.”

By presenting the factory as a done deal that will churn out new cars before this year is over, Tesla hasn’t maneuvered itself into an enviable negotiating position with the gaggle of hungry Chinese banks.

Part of the art of the haggle in China is the ability to get up, and walk away anytime. Instead, Tesla has openly hitched its future on the factory, and as far as the banks are concerned, Tesla painted itself into Shanghai’s muddy southeastern corner. No wonder Shanghai lenders are falling over themselves to cut a deal with the naïve lao wai.

Also, by promising too loudly that Tesla will make Made-in-China Model 3 this year, mei wen ti, Musk simply convinced Chinese customers to take him by his word, and wait until the much cheaper Tesla arrives.

Already, Musk had to implore Chinese customers to buy the much pricier imported Model 3 now so that “we can better build our Gigafactory.” It is extremely doubtful that this approach will resonate in China. Never beg.