Tesla Denied Tariff Exemption for Chinese-made CPU in the Model 3
In the escalating trade war between the Trump administration and China, President Trump raised tariffs up to 25% on autos, auto parts and about $200 billion of other Chinese-made goods, some of which are imported by Tesla to manufacture its electric cars.
Electric automaker Tesla sought since last summer a tariff exemption for the Chinese made "brain" or CPU that is used in the Model 3 and another for the center-mounted touchscreen display. Both requests have been officially denied.
The U.S. Trade Representative's Office denied both requests in letters dated May 29, saying they both concern "a product strategically important or related to "Made in China 2025" or other Chinese industrial programs." according to letters viewed by Reuters.
The tariff could have a significant impact on Tesla's profit margin and the car's final price, all at a time when Musk is looking to ramp up production of its first mass-market electric car. The parts are subject to a import tariff of up to 25%, which ultimately contributes to the final cost of the Model 3.
The CPU that runs Tesla's Autopilot autonomous driving feature is made by Chinese supplier Quanta Shanghai.
On April 29, Tesla wrote in a securities filing that "our costs for producing our vehicles in the U.S. have also been affected by import duties on certain components sourced from China."
Tesla first made its request to exclude its Model 3 CPU in July 2018, when the automaker warned that "increased tariffs on this particular part cause economic harm to Tesla, through the increase of costs and impact to profitability."
Tesla had also urged the office to approve a request by its supplier SAS Automotive USA Inc, builder of the center touchscreen display for the Model 3.
Tesla CEO Elon Musk claims that the automaker was forced to souce the component from Chinese supplier Quanta, claiming that no U.S. company could manufacture the component to Tesla's specifications and in the volume required. The automaker told U.S. officials that "choosing any other supplier would have delayed the Model 3 launch by 18 months.
Tesla said it refreshes the Autopilot CPU with the latest firmware developed in California when it is shipped from China.
Made in China 2025
Made in China 2025 is a strategic plan to move away from producing inexpensive goods to producing higher value products and services, boosting China's manufacturing capabilities.
The goals of Made in China 2025 include increasing the Chinese-domestic content of core materials to 40 percent by 2020 and 70 percent by 2025, transforming China into a manufacturing superpower. The plan focuses on high-tech fields including new energy vehicles, semiconductors, aerospace, artificial intelligence and robotics.
As previously reported, U.S. trade officials also rejected separate requests from automakers General Motors and Chinese-owned Volvo Cars for an exemption to a 25% U.S. tariff on their Chinese-made SUVs, which include the Buick Envision crossover and mide-size Volvo XC60.
The Envision accounted for nearly 15 percent of the Buick brand sales last year. As a result of the tariffs, GM said is will no longer sell the Envision in the U.S.
So far, both GM and Volvo Cars, which is owned by Chinese automaker Geely, had not raised the price as a result of the higher tariffs, which took effect in July 2018.
The Tesla model 3 starts at $35,000 in the U.S. and higher tariffs may affect its future pricing at a critical time for the automaker, as it is counting on Model 3 sales to become profitable.
Tesla has also benefited from the federal EV tax credit of up to $7,500 on the purchase of a Tesla vehicle. The credit was designed to encourage the purchase of a plug-in-hybrid or zero-emissions electric vehicle.
The credit was halved to $3,750 last year when Tesla hit the sales cap of 200,000 qualifying vehicles. On July 1, the federal EV tax credit falls to $1,750 for Tesla models, before expiring altogether at the end of the year.
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