Tesla's Future In China Depends On Outcome Of US-China Trade Situation

A worker walks past the construction site of U.S. electric carmaker Tesla's Gigafactory in Shanghai, China September 28, 2019.
(Photo: REUTERS/Yilei Sun)

Tesla's warm welcome from the Chinese businessmen signaled a milestone for the American company's venture into foreign soil. However, the company should not jubilate just yet.

With the US and China still at loggerheads in the trade front, any sort of disturbance in what analysts may call the early stages of Tesla's success outside its own soil would be unwelcome news for the company.

China is an important market for Tesla, as well as for many other companies aside from the US. And with Tesla's GigaFactory 3 starting to emerge as a huge potential source of cash for the electric car giant, it now all comes down to how the tariff, politics and blacklisting issue will play out that will have an impact on Tesla's foothold in China.

"I think right now the impact has been tepid," Dan Ives, Wedbush tech strategist, said.  "If the situation heats up, it could surely be a black cloud for Tesla," he added.

The Chinese market has generated more than $1 billion in sales for Tesla for the second quarter alone. The company reported that it had robust sales from its Model 3, Model S and X in the third quarter. This was after China approved a 10 percent purchase tax cut for Tesla.

As a result, the tax reduction grant was considered as a present by Beijing to CEO Elon Musk and his top executives: it helps the company cushion the cost hikes from the 25 percent taxes on car imports from the US, set to take effect on December 15.

Fueling this demand in mainland China is crucial for Tesla - in many aspects, the 25 percent taxes on top of other duties on car imports have increased the likelihood for cars to have a price tag of more than 50 percent in China after December 15.

"China is really going to fuel the engine," Ives stressed, adding that it will be very important for the government as well to protect Tesla's interest "from a growth perspective going forward next year."

But the acquired tax cuts could easily be withdrawn by China if economic frictions with the US continue to deepen, as it is what seems to be happening prior to the start of the next round of meetings this week.

Should Chinese commerce ministers decide recanting on their tariff reduction deal would be to their best interest, it would leave Tesla vulnerable to the 25 percent mandatory taxes. Given that Tesla already has an enormous price tag in China, its sales could suffer until operations at its GigaFactory 3 goes full blast.

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