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Tesla appears ready to make cars in China, but the terms of the relationship are unclear

Tesla appears ready to make cars in China, but the terms of the relationship are unclear
Teslas charge up in Beijing. (Roman Pilipey / European Pressphoto Agency)

Tesla is about to make history as the first foreign automaker to build cars in China independently, without having to link up in a joint venture with a Chinese company and give away half its profits and much of its technological know-how as part of the bargain.

What's not clear is whether Elon Musk's company will have to strike other compromises — such as a battery-making partnership — as part of the deal.

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Over the weekend, the Wall Street Journal reported that electric car maker Tesla and the government of Shanghai had "reached an agreement" to build an auto assembly plant there. The Shanghai government soon told Bloomberg that no agreement had yet been signed, however.

But it's clear something big is in the works. "As we've said before," Tesla commented, it is in talks with Shanghai and "we expect to more clearly define our plans for production in China by the end of the year."

If an agreement is struck, it will be "precedent setting," said Mark Wakefield, managing director at consulting firm AlixPartners. "It's a big deal."

Indeed, such an arrangement would break with the decades-long approach to foreign access to the huge and fast-growing Chinese motor vehicle market. China is the world's largest car market, with almost 30 million passenger vehicles to be sold by the end of the year, compared with about 17 million in the U.S.

Ford, General Motors, Volkswagen and Nissan all have been required to enter into a 50-50 joint venture with a local Chinese automaker, in which profits are split and much of the technology developed by the foreign manufacturers is shared.

"Local partners for every other global manufacturer in China are pretty much dead weight for the joint ventures in that they bring nothing to the table while taking about half the profits on every vehicle sold," said G.E. Anderson, a Taiwan-based consultant.

The foreign companies would certainly like a better deal, but they've been unwilling to make the tradeoff that Tesla is apparently prepared to accept: a 25% tariff on cars built in a China free-trade zone like the one near Shanghai — the same tariff applied to any company that exports a motor vehicle into China.

Analysts note that the luxury Tesla Model S and Model X cars now exported to China from the company's sole assembly plant — in Fremont, Calif. — are saddled with the tariff anyway.

By doing away with shipping costs, by locally sourcing less expensive Chinese components, and by paying a Shanghai factory workforce far less than it would pay California workers, Tesla could reduce expenses and, if it needed to, reduce prices.

Tesla could also more cheaply export cars from China to Japan, South Korea and other markets in Asia, whose own tariffs are far less severe than China's.

It's unclear, though, whether the Tesla deal in the long run will truly alter the relationship between the carmaker and China. The joint ventures struck by the major automakers cover all powertrains, whether they use gasoline, diesel or electricity.

"What isn't clear," said Qian Xu, who runs AlixPartners' China operation, "is where the batteries will come from. I think there's another shoe yet to drop."

Tesla makes electric car battery packs at a giant factory it owns and operates in Nevada. Battery packs are the heaviest and most expensive parts on an electric car. Analyst estimate the battery cost to Tesla ranges between $15,000 and $20,000 per vehicle.

Xu said battery provisions in the contract will show whether Tesla is giving up a little or a lot for the privilege of building cars in Shanghai.

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Besides a concerted push by the Chinese government to spur development of electric cars, in an attempt to cut pollution and move into the leading ranks of worldwide auto manufacturers, China is also dedicated to a world-leading motor vehicle battery business.

Chinese leaders recently announced plans to ban new sales of cars that run primarily on fossil fuels by 2040 or sooner.

"If China is looking to reduce pollution, to get the industry to meet strict 2020 emission standards, and phase out internal combustion engines, it's going to have to bring in someone like Tesla," said Steve Man, Hong Kong-based auto analyst for Bloomberg Intelligence, which researches the market.

"The government wants to show the rest of the world that the government is really serious about the new-energy vehicle market," said Xu — and meanwhile spur its own electric car makers into building vehicles with high-style looks that are fun to drive, which Tesla has achieved.

It's also possible, Xu said, that Tesla will manufacture batteries in China to supply the cars it makes there. He noted that Panasonic, Tesla's battery-cell provider in Nevada, recently opened a fabrication line outside of Shanghai to make the same kind of battery cells Tesla uses in the Model S and Model X.

However, Japan-owned Panasonic, like South Korea-owned battery cell makers LG and Samsung, has not been approved for the same government subsidies that China gives indigenous battery cell makers. That could mean higher costs for Tesla.

Another question for Tesla is where the capital to build the factory will come from. The company has been in startup mode for 14 years, has never earned an annual profit and relies on lenders and stock investors who buy into its long-term vision, which also includes battery storage cells and solar roofs for homes and businesses.

Meyers, a special correspondent, reported from Beijing.

Twitter: @jessicameyers

Twitter: @russ1mitchell

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