Here's Why the Tesla Factory in China is Critical – The Motley Fool

Unless you are hiding in a cave, you must have noticed trade tensions between the United States and China. Not later than in May, China planned to reduce import duties on many vehicles by 25% to 15%. Tensions are intensifying and, in response to President Donald Trump's decision to charge $ 34 billion worth of Chinese goods, China has imposed tariffs on US products, including imports. of cars. Now the Trump administration is threatening to more than double and release 10% tariffs on an additional $ 200 billion worth of Chinese goods.

Tesla (NASDAQ: TSLA) was in negotiations to build a factory in China for some time – as a way to avoid such tariffs on the vehicles that he sends in China – and automaker An agreement to build its second global assembly plant will give it power

Problem and Solution

Apart from the subject of trade tension, there is a reason why Tesla and China are a paradise. China has a massive and well-documented pollution problem. Decades of rapid economic expansion have turned the country into a world power, but also into the world's largest emitter of carbon dioxide. In fact, China's "environmental census" has revealed that the number of pollution sources – think factories and others – has risen from 5.9 million in 2010 to 9 million currently.

These pollution problems are a major concern for the government, and its response has been to push strongly the electric vehicle. incentives to help reduce emissions. China is already the world's largest market for electric vehicles, so what better region for Tesla, which burns cash at a frightening rate, to accelerate sales, and get help in its march towards profitability? This is why Tesla's recent preliminary agreement with Shanghai to build a plant there will be one of the biggest developments for investors over the next two years.

Why is the factory of China so important?

China is already a big part of Tesla's activities. The company has tripled its sales from 2015 to 2016, generating more than $ 1 billion, and then doubled in 2017 to $ 2 billion – accounting for 17% of the 2017 Tesla business. Here's the problem: Due to China's retaliatory tariffs on US imports, including US-built automobiles, Tesla had to raise its prices by over $ 30,000 in China for its X-Model vehicles and S. Tesla 's hand was forced because she always loses money and money burning, and is therefore unable to absorb customs fees, but this increase is going inevitably put the price out of reach for some Chinese consumers

Fortunately, Tesla 's assembly plant in China will allow the automaker to dodge these tariffs, even if it' s only in a few years time. Tesla's planned capacity for its second global assembly plant is 500,000 vehicles a year and, in November, CEO Elon Musk said the company was three years away from production there. It always seems like a solid time frame.

Last year in China, sales of new energy vehicles – a figure that includes rechargeable hybrid vehicles, powered by batteries and fuel cells – reached 777,000 vehicles and are expected to reach about 1 million this year. year, according to Automotive News . Here's the kicker: The Chinese government is targeting 7 million of these vehicles annually by 2025. This is a growth that has drooled Tesla investors. In the automotive industry, which is cyclical and capital-intensive, Tesla can not afford to have uncertainties such as import tariffs ranging between 15% and 40%, so building its factory in China is obvious. It could mark the time when Tesla will pass from an unprofitable query point to a global EV power station. The big question now is: Who will pay for this?

Daniel Miller has no position in any of the actions mentioned. The Motley Fool owns and recommends Tesla shares. The Motley Fool has a disclosure policy.