Tesla to Hold Off Buying Land to Expand its Shanghai Factory Due to Ongoing U.S.-China Tensions
California automaker Tesla Inc. is putting its expansion plans in China on hold due to rising tensions between the U.S. and China. The news was first reported by Reuters. Tesla was reportedly looking to purchase land adjacent to its Shanghai factory for future expansion to meet demand in the world's biggest auto market.
Tesla now intends to limit the proportion of China output in its global production, two of the four people said. Part of the reason for Tesla's decision to hold off on expansion is the 25% tariffs on imported Chinese electric vehicles imposed on top of existing levies under former President Donald Trump that are still in place, but it appears that other factors are at play.
However, in March, Tesla refrained from bidding on a plot of land across the road from its Shanghai factory, as it no longer aimed to boost China production capacity significantly, at least for now, three of the people said. The sources declined to be named as the discussions were private.
With 25% tariffs on imported Chinese electric vehicles imposed on top of existing levies under former President Donald Trump still in place, Tesla now intends to limit the proportion of China output in its global production, two of the four people said.
According to Reuters, Tesla originally planned to buy the land and make it a global export hub where its can ship its electric vehicles to other markets. Tesla even considered expanding exports of its China-made entry-level Model 3 to more markets, including the United States, according to Retuers sources. This plan was previously unknown.
Tesla now intends to limit the proportion of China output as part of its total global production, the people said.
Tesla's Shanghai factory is designed to manufacture up to 500,000 vehicles per year. It's currently producing the Model 3 and Model Y crossover at a rate of 450,000 units per year. In addition, Tesla currently ships some China-made Model 3s to Europe.
Although Tesla never stated its intent to acquire the land, expanding its Shanghai factory would enable the company to produce another 200,000 to 300,000 cars annually to meet expected demand.
But Tesla is also building a factory in Germany where it will build electric vehicles for the European market. Once the German factory is up and running, Tesla won't have to ship as many vehicles to Europe from China, unless demand sharply rises.
Tesla still has other land it can use for expansion in Shanghai. One area at the site designed for production is currently being used for parking. One of the people said Tesla could expand its capacity beyond 500,000 on this existing site. Another source said Tesla may acquire more land in the future.
The Shanghai government has been talking to several companies to sell the land for new-energy commercial vehicle production, said a person with direct knowledge of the matter.
Last month, Reuters reported that Tesla was planning to build facilities for recycling battery cells and other electric vehicle components such as electric motors at its factory in Shanghai, according to a document submitted by Tesla to local authorities. The document also said Tesla will add manufacturing capacities for car structures and electric motor controllers.
Tesla holds a big advantage in China over rival automakers, including BMW, Mercedes Benz and Ford Motor Co., as its wholly owns its factory. Tesla was the first foreign automaker to build a factory after the country relaxed rules requiring that foreign automakers own no more than 50% of their joint venture partnerships with a Chinese automakers. The factory allows Tesla to avoid steep import tariffs.
In 2020, Tesla will become the world's most valuable automaker with a market cap topping $700 billion. But Tesla is facing growing competition in China from new EV startups such as Xpeng and Nio, both of which are experiencing growing sales.
Tesla is also under fire for the way it handles data and customer complaints in China. Last week, Tesla said its developing a platform for car owners in China that will allow them to access data generated by their vehicles. The company aims to launch the platform by this year.
Last month, Tesla was targeted by state media and regulators after a customer angry over the handling of her complaint about malfunctioning brakes, climbed on top of a Tesla vehicle in protest at the Shanghai auto show. The video of the incident went viral, forcing Tesla to answer to Chinese regulators and change how its does business.
Tesla said it would set up a China data center, launch self-inspection to improve services and work more closely with regulators.
China remains an important market for Tesla to maintain profitability, so the decision to hold off on expansion is a weighty one. The company generated $3 billion in revenue in the first three months of this year, accounting for 30% of its total revenue.
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