Charged up about the Political Meaning of Tesla in China: Time to Apply the Brakes?

Dr. Jean-Marc F. Blanchard's picture

In 2017, it was revealed American electric vehicle (EV) maker Tesla had concluded an agreement with Shanghai to build a manufacturing complex in Shanghai that, per Tesla CEO Elon Musk, will be extremely advanced and produce cars customized for the China market. While this was the company’s first major foray abroad, what drew the most attention was the fact Tesla would own 100 percent of its venture in China, quite significant given nearly 100 percent of foreign car companies have been required to enter joint ventures. The deal offered Tesla a deeper toehold in a major potential market, a way to evade the onerous tariffs facing its imports into China, and control over its intellectual property (IP). For Shanghai, the deal meant a huge foreign direct investment (FDI) inflow and a new research and development facility. For China, luring Tesla held the promise of advancing its EV sector and efforts to improve air quality, demonstrating its willingness to open pillar sectors to foreign competition and protect foreign IP, and potentially diffusing escalating trade tensions with Washington. The import of the latter two goals seem validated by the fact Chinese Premier Li Keqiang met with Musk in January and stated, “he hoped Tesla can become an ‘in-depth participant in China’s opening and a promoter of the stability of Chinese-U.S. relations.’” It remains to be seen, though, if the Tesla deal really signifies an acceleration of reform rather than yet another one-off. It is possible Beijing will not give Tesla full rein in China, may later pressure it to transfer technology or work with Chinese partners, or does not actually expect Tesla to challenge domestic firms given its disadvantages versus Chinese EV players. For now, foreign investors may be wise to put the brakes on their excitement until the road is clearer.