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Tesla Motors Inc (TSLA) to Build Factory in China? Analysts Say it’s Too Soon

Tesla Motors Inc TSLA China

Tesla Motors Inc could be heading to China to build a factory. If the “bao fa hu” ultra-rich Chinese continue to crave luxury-class EVs and if the upwardly mobile Chinese middle class retain their love for EVs a local factory might make sense. Tesla co-founder and Chief Technical Officer JB Straubel has hinted that the firm is open to the possibility of launching a factory in China going forward. Opening a factory in China sounds like a logical move because the firm sells many cars in China.

Tesla Motors Inc TSLA China

China has an air pollution problem and the government and citizenry are looking to EVs to reduce smog in its densely populated cities.  The Chinese government is supporting the EV sector in the country with incentives for both producers and consumers, and analysts have forecasted that China might become the largest EV market in the world. It is worthy of note that Chinese NEV (new-energy vehicles) sales grew 4X in 2015 to 330,000 cars.

China is important to Tesla’s growth

The warm reception that the Model 3 has seen in China suggests that Tesla Motors Inc  might have finally unlocked the key to getting a bigger market share in the Chinese auto market. China is the second largest market for Tesla’s mass market Model 3 EV.  Just after the unveiling of the Model 3, it was reported that Chinese buyers ordered the second largest number of Model 3 EVs.  Tesla’s global vice-president Robin Ren noted that “the potential is huge, and Tesla is fully committed to developing the Chinese market.”

Interestingly, China was the second biggest market for Tesla in 2015. The firm recorded revenue of $319M from Chinese buyers in 2015 even though it saw a 33% decline in revenue. Ren says, “our mission is to promote the use of electric cars in the world, this cannot be achieved without our presence in China.”  More than 20 million new cars were sold in China last year and Chinese factory could make it easier for Tesla to sell more its EVs in the country.

Currently, most of the Chinese sales that Tesla records are to diehard fans or extremely rich folks because its cars are more expensive than EVs produced in the local Chinese market. Of course, one could argue that Tesla builds the best EVs on the market right now and that it doesn’t make much sense to compare a Tesla to an EV built by a Chinese firm.

However, the average consumer who is in the market for an affordable EV that could take them from point A to point B might not have enough incentive to buy a $35,000 Model 3 when they could get something much cheaper from Chinese automaker.

If Tesla goes ahead to build a factory in the China, the move would make its cars cheaper for Chinese buyers because they won’t have to pay exorbitant import duties and tax. More so, building the cars locally in China could reduce the time between when a buyer places an order and when the car is finally delivered.

Analysts think China is not yet ripe for Tesla

Despite the fact that it makes sense for Tesla Motors Inc  to set up shop in China, some analysts think the firm might be heading too fast into China. To start with, Zhang Yu, an analyst at consultancy Automotive Foresight opines that “the infrastructure for new-energy vehicles (NEVs) is not mature enough, customers will prefer cheaper models. Although Model 3 is claimed to be an affordable one, the price is still too high.”

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Victor Alagbe is a seasoned business and finance writer with a specialty in writing about how to invest for the long-term in healthcare, pharmacology, energy and tech stocks. His long-term focus is on stocks that provide a nice mix of growth and income. For the short term, he passionately writes about trading stock options for the excitement and leverage that stock options offer.

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