Tesla Inc is opening a factory in China. On Tuesday morning shares in the firm were rising on a report, from Bloomberg, that the Palo Alto car-maker had reached a deal to build cars in the East Asian country. Shares are up more than 1 percent in pre-market trading, but where there’s reward there’s risk.
The China deal could be a huge one for Tesla. The agreement, as reported, would bring Tesla building to the Lingang development zone in Shanghai. Right now Tesla buyers faces a 25 tariff on vehicles imported into the country. Cutting that tax could allow the firm to boost demand ahead of the full-scale production of the mass-market Model 3.
Because of local laws it is almost guaranteed that Tesla will have to partner with a local Chinese company on the factory. It is not immediately clear who the local firm would be, but no matter their identity they bring a host of risks with them.
Tesla Inc may start leaking information soon
Tesla keeps most of its essential technologies tight to its chest. That may become less and less possible as it moves into the Chinese market. Firms in that country are known for their, to put it lightly, sub-standard cybersecurity. Corporate espionage may be a major problem in the United States right now, but in China it is much more severe.
The level of risk that Tesla is exposed to depends on the sort of deal the firm strikes in China. The fact that it will need a partner, something Tesla Inc has tried to get around in the past, will worry some on Wall Street.
China exercises a lot of control over its car market, and it’s not clear what sort of deal Tesla will be able to get from the firm’s sole Communist Party.
Tencent Holdings Ltd., a Chinese internet conglomerate with a penchant for international investments, currently owns about 5 percent of total Tesla stock. They could be an unorthodox choice for a local partner. Whoever Mr. Musk has chosen to throw in his lot with will be under extreme scrutiny.
If the Tesla deal is a solely manufacturing-by-numbers affair, investors will have their nerves calmed. If it involves any of the more important Tesla manufacturing functions, with batteries or Autopilot tech, there will be some risk of leaks.
Despite the risks involved, China is a very fertile market for the electric car. The country’s leaders want to multiply sales of new-energy vehicles over the coming decade. They hope the changeover will improve air quality, and reduce reliance on fossil fuels.
Tesla stock relies on trade secrets
Tesla Inc has done its best to keep up the appearance of openness. The firm has one of the more transparency-minded PR teams, including CEO Elon Musk, on Wall Street. Patents from the company’s engineer’s are open to license for free. That’s only the part of the story that Tesla wants to tell, however.
Most of the stuff that tech a Model S so cool is never patented. It’s kept as proprietary information inside the company. These “trade secrets” are really what make Tesla tick.
Why is Tesla Inc so reluctant to file patents? The first problem is reverse engineering. In order to get a patent you have to make your design public. That means other firms can see what you did, and try to emulate it without copying it.
The second issue is expiry dates. Trade secrets never expire, patents must by law. A related problem is that of “essential patents.” These are patents that you are forced to share with competitors to uphold technical standards. That’s for the good of the market, but it may not be best for the inventor.
If Palo Alto patents its battery tech, the government could try to force it to share those designs. That would increase cash flow, making things seem a little brighter in the short term. Unfortunately it would also disrupt the firm’s almost monopolistic advantage in the EV space.
China is a dream for Tesla stock
Elon Musk may convince Chinese authorities to let him set up a “build-only” factory in Shanghai. If he manages that, the Chinese market might be all upside for the EV maker. The outfit has promised to increase car builds to about 500,000 next year. It’s going to need a huge market in order to sell all of that capacity.
It’s unlikely, even if the deal is unveiled this week as rumored, that a Chinese factory will contribute to that number. Car factories are very complicated enterprises. As executives on the Musk team know, they take a long time to set up and even longer to get working efficiently.
Tesla stock has been flying upward since the start of the year. It’s likely that traders trust the firm to see the importance of its tech.They’ll be watching closely for the details of the deal in order to make a good judgments on the risks involved.
Tesla Inc stock was selling for $380.20 at time of writing. That’s an increase of 2.81 percent over Monday’s close. The increase was recorded at low volume in pre-market trading. Therefore it may evaporate, or grow larger, once markets truly open.
Because of the massive size of the potential market, Wall Street is likely to see this deal as all upside, at least to start off with.
A road for Tesla stock to rise
On Tuesday morning Baird released a new report on the firm’s share outlook. Analyst Ben Kallo believes that Tesla stock is worth $368 per share. In his view the Model 3 rollout is on schedule, and the firm’s opportunities in green energy, and energy storage, are being downplayed by most investors.
Tesla stock is performing well because people believe that it’s very far ahead of the competition. Should that mask slip, say with another firm pushing out battery tech, Musk could be in trouble. Tesla doesn’t keep it’s technology close to its chest because they’re bad people.
They do it because that’s their lifeblood. The firm wouldn’t exist without the incredible knowledge they’ve gained about EV-making. As details about the deal emerge, those holding Tesla stock will be hoping that the firm does absolutely everything it can to protect that core.
We should get more details on the China deal this week unless, true to form, Elon Musk decides it’s on a need-to-know basis. If the CEO does decide to obfuscate those details, Wall Street should demand answers. It’s investor money, after all, that the firm is playing with. Taking massive risks is part of the Tesla philosophy, but putting key tech on the line could be a step too far for some investors.