During Tesla’s quarterly conference call earlier this week, Chief Executive Elon Musk once again emphasized the company’s grand ambitions for the Chinese market.
The Risks and Promises of Tesla’s Bold China Bet
The electric car maker is building out charging stations and planning a manufacturing plant in China.
Shutterstock / Aleksandar Mijatovic
It’s a note he has been hitting a lot, including during the previous investor call, at the Geekpark Conference in Beijing last month and in the top section of the company’s letter to shareholders on Tuesday.
“We plan to expand in China as fast as possible because we believe the country could be one of our largest markets within a few years,” Musk and Chief Financial Officer Deepak Ahuja wrote.
The Palo Alto, Calif., electric vehicle manufacturer just delivered its first cars in the nation of 1.35 billion people, after more than a year of lining up necessary government approvals. It’s building out its network of battery-charging stations and service centers there “as fast as possible,” Musk said on the call. And the company plans to start manufacturing automobiles in the country within the next four years, which would allow it to get around stiff import tariffs and minimize logistics costs.
“Shipping two tons of metal over long distances is not very efficient,” Musk said. “It’s just the sensible thing to do to try to satisfy local demand with local production.”
It’s a big expensive bet at a point when the company is making a lot of big expensive bets, notably including the buildout of its Supercharger network throughout the United States and now multiple groundbreakings on its several-billion-dollar Gigafactory battery plant.
It’s also worth noting that it’s laying the bet at a point when the company is still supply constrained by the availability of lithium-ion batteries that power its vehicles and ramping production at its plant in Fremont, Calif.
Indeed, Musk said as much on the call, noting: “I think we’ll actually have to limit the amount of cars we send to China, otherwise we could starve the rest of the world’s production.”
So why lay the groundwork now?
The fact that China is the world’s largest automobile market and the fastest growing might be reason enough. But the nation is also particularly attractive for Tesla because it’s actually starting to take the issue of green energy seriously, in the face of enormous challenges with air pollution and the rapidly escalating energy demands of its citizens.
The government seems to have taken active steps to support the rollout of Tesla’s nonpolluting electric vehicles and related services.
As Musk and Ahuja wrote to shareholders:
We are also encouraged by how fast we have been able to develop our infrastructure in China when the proper support is in place. With the help of the Shanghai government, for example, we were able to construct a Supercharger station within just a few weeks of site selection. At the start of China deliveries we had three Supercharging sites open, each powered by clean electricity from solar panels. Our plans are to install a large Supercharger network in China.
Shanghai’s government also announced that Model S buyers will get free license plates, avoiding a public auction process that can cost up to $15,000 per plate.
“Since Model S pricing in China was already very competitive, this makes the car’s value proposition even more compelling,” read the letter.
Still, Tesla’s ambitions aren’t without risks.
There are unique challenges that come with competing in China. Just ask Google.
Indeed, businesses will tell you — at least, off the record — that China favors its domestic companies in subtle and not so subtle ways, some of which don’t become fully apparent until after sizable investments have been made in local factories, staffing and the like. Joint ventures in the past have famously ended up looking like intellectual property grabs.
For the auto industry in China, there’s the added risk of overcapacity. There are nearly 200 domestic automakers in China, with varying levels of government ties. Meanwhile, auto giants like GM, Ford and Volkswagen have been building assembly lines and joint ventures there for years.
But Musk is surely aware of the dangers and still appears comfortable heading into the country at full speed.
“I really don’t think we’ve got any kind of demand challenge in China,” he said. “In fact, I was blown away during my visit by the level of enthusiasm and interest for Tesla, and the amount of goodwill that I encountered from people at all levels, from the government, from people in industry and from consumers in general.”
“I’m really optimistic about how things will go there,” he added.
This article originally appeared on Recode.net.
