Tesla Motors, Inc. (NASDAQ:TSLA) Seeks Partner, Tax Breaks and Subsidies in China

Tesla Motors Inc (NASDAQ:TSLA)

Tesla Motors, Inc. (NASDAQ:TSLA) has done well in the US with the help of a bevy of state grants and tax breaks, but the Chinese Government isn’t giving Tesla the same kind of help and that’s making things difficult for the automaker. Kandi Technologies Group Inc (NASDAQ:KNDI), China’s biggest EV seller in 2014, grabbed a $44.3 million grant from the country’s government last year.

The grant, which was given in order to support a joint sales venture, helped the firm to secure sales of more than 10,000 EVs in the country last year. The number dwarfs the 2,500 Model S sedans that Tesla Motors managed to move in the country in 2014, and shows that state support, or lack thereof, still has an important place in driving EV sales around the world.

Tesla Motors rival grabs state support

Last year Kandi Technologies formed a joint venture with Geely Automobiles Holding in order to sell its cars in the country. Chief Executive Hu Xiaoming said, after an earnings report that showed year on year sales growth of 80%, that “strong financial support” from the state was key in making his firm the EV leader in China last year.

Shares in the firm, which is based in Jinhua, China, jumped by close to 7% on Tuesday’s market as a result of the release.

Tesla Motors has, if rumors are believed, been looking into forming its own joint venture with a firm based in China. that would free it from some of the taxes and tariffs that have increased the price tag on its cars and forced sales down a tightening path. In May, says a report from JL Warren Capital, Tesla Motors sold just 163 cars in the country.

The same firm reported that Tesla managed to sell more than 1,000 cars in the first quarter, a number that was welcomed by Wall Street. Back in 2014 Elon Musk, the CEO of Tesla Motors, said he was sure that China would be a strong market for the country in 2014.

Former Tesla China chief Veronica Wu forecast that the country would be responsible for more than 30% of the firm’s sales across the world that year. That did not come to pass, and the firm’s shares suffered badly in the first quarter of 2015 as a result.

In August of last year Tesla Motors revealed a joint venture with China Unicom. The deal will see Tesla build 400 SuperChargers on retail outlets owned by the firm. That deal will help to make the Model S a more appealing buy for Chinese Tesla fans, but it’s not going to lower the price of the car.

A joint venture of a more substantial nature is needed to do that, and though Tesla’s CEO has made it clear that he’s serious about getting into China, he has not given away much information about a possible move into a joint venture, something that Tesla may badly need to grow in the country.

Tesla needs a China venture

Just as shares in Tesla Motors were hitting lows off of concerns for sales of the firm’s cars in China, rumors emerged that the firm was looking into a joint venture with a local firm in order to benefit from tax breaks and the kind of subsidy that Kandi Technologies got its hands on last year.

Lifan Industry (group) Co Ltd (SHA:601777) was at the top of the bill of those rumors the last time around, but it seems that Tesla has gone in a different direction. Reality is what it is, however, and Elon Musk’s attempts to change the laws in the USA have not gone as well as planned. There’s little reason to think he can change the laws in China.

WantChinaTimes said last year that Tesla Motors was looking at both Lifan Group, and Chang’an Automobile Group as partners to help it build and sell its car inside the country. Those rumors have since died down, but Elon Musk may have to alter his strategy in order to get a foothold in the Chinese market.

Other luxury car-makers use local partners in order to help them skirt large tariffs that make their cars much more costly to the Chinese buyer. BMW Brilliance was created in 2003 by German car-maker BMW and Shenyang-based Brilliance Auto.

That has allowed it lower the price of its cars, and build models, including the EV crossover Zinoro 1E, directly for the Chinese market.

Shanghai’s National Business Daily said that Tesla Motors could save up to $11,300-$13,000 on the selling price of each Model S if it were to form such a venture.

Tesla Motors to build cars in China

Elon Musk gives himself, and Tesla Motors, quite a lot of deadlines, but it’s not all that common for the firm to meet them. In an interview with state-run news agency Xinhua published on March 27 2015, Mr. Musk said that the firm would “establish both local production and local engineering in China.”

He said that the move could be possible “”in three years,” but he hasn’t said much of anything about the firm’s progress in making its way into the country since then. In the same piece Mr. Musk blamed his poor forecast of China sales on “scalpers” that ordered the car but didn’t buy it.

He added that “It is clear that we need to think of China in a very long-term way. We need to steadily boost the confidence of the Chinese consumers.” What is not clear is what that means for sales of the Model S and Model X in the country until Tesla gets its factory ready. 

It’s also not clear if the firm would partner with a Chinese business in order to do that, or if it would try to go it alone and build out its own factory in the Middle Kingdom.

Tesla doesn’t get enough grants

“The national government’s strong financial support” is part, as CEO Xiaoming says, of the mix that drives the success of Kandi Technologies in China. In the United States, government grants and tax breaks have helped to lower the cost of the Model S and make it affordable to a much wider group of people.

The opposite is the case in China. Tesla Motors is importing cars into the country, and that’s causing them to go up in price. High prices, as any Econ 101 student will tell you, mean lower sales, all else remaining equal. That’s going to be a problem for Tesla in China no matter what.

For now, it seems, there’s no use in looking east for sales of the Tesla motors Model S, but those with shares in the firm might not need to. Stifel Nicolaus analyst James Albertine said earlier this year that he expects sales at Tesla to hit 500,000 in line with Mr. Musk’s forecast, but he says the firm need not rely on China to get there.

Mr. Albertine says that shares in Tesla Motors will rise to $400 in the next twelve months. Other analysts seem to be similarly positive on Tesla sales despite issues in China.

Looking forward to Q2 sales, which are due to be revealed this week, Baird’s Ben Kallo, Trip Chowdhry from Global Equities Research and Dan Galves of Credit Suisse all expect the firm to show numbers that meet or exceed sales forecasts for the three months through June.

For now China is being left behind by Tesla Motors, in favor perhaps of a growing focus on Japan. Kandi Technologies showed on Tuesday that there is money to be made in China’s EV market and Tesla is missing out. Mr. Musk, at some point in the near future, may have to bite the bullet and just form a joint venture, no matter how much he hates dealerships.

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