Making Signals out of Tesla Turns and its Implications for Foreign Firms

Tesla’s top brass, employees, and shareholders must be charged up about the surfeit of good news in the People’s Republic of China (PRC) over roughly the past three months after the world’s most famous electric vehicle (EV) firm hit a slew of potholes there. In late April, PRC Premier Li Qiang hosted Tesla CEO Elon Musk. Around the same time, the Chinese government announced that Tesla met China’s demanding auto data security requirements.[i] The next month, Tesla received a rapidly processed permit to construct a $200 million mega battery plant.[ii] As if that was not enough, in mid-June, Shanghai gave Tesla approval to test the full self-driving (FSD) feature on a limited number of vehicles on a bounded number of streets.[iii] Then, at the beginning of July, Jiangsu Province put Tesla’s Model Y, the only car from a foreign company, on the list of cars approved for government purchase.[iv] This piece discusses the implications of Tesla’s recent smooth ride for foreign firms, many pondering their future in and working with the world’s second largest economy.

Tesla started selling cars in China in 2014. By 2018, it had established Tesla Shanghai, a wholly owned automobile subsidiary (the only one by a foreign company in China), and within a very short period of time thereafter started to produce cars at its Shanghai Gigafactory. Motivated by various considerations, the Shanghai government supplied Tesla with major support in the form of subsidies, loans, and grants. Moreover, China provided Tesla with reduced tax rates. During the Covid-19 pandemic, China also took measures to ensure Tesla could maintain auto production.[v] Over time, China has become exceptionally important to Tesla as a production base (50 percent of total 2024 global production), source of overall global revenue (one-fourth in 2023), and market (not just in terms of scale, but also as an alternative to other markets like Europe and the U.S.).[vi]

Tesla has been encountering numerous detours in China. For instance, its Gigafactory expansion plans stalled in 2022 and 2023 due to data security concerns relating to Musk owned Starlink and Tesla cars, for parts of 2023 and 2024, were banned from entering airports, military complexes, the sites of important political and sporting events, state-owned enterprises, local government offices, and even cultural centers. Tesla still does not have unrestricted rights to transfer data out of China or test FSD and remains off the vast majority of government procurement lists.[vii] Tesla also has run into intellectual property and local content challenges, being obligated to use Baidu’s mapping and navigation systems and incorporate 90 percent Chinese-made parts and components in its Gigafactory cars, the latter which developed the local supply chain and Tesla’s future competitors.[viii] Many in Washington are up in arms about Tesla’s contribution to China and the concentration of EV supply chains in the PRC, which has incentivized Tesla to push its suppliers to build components and parts outside of China and Taiwan.[ix] Shifting out of the politics lane, Tesla is facing intense competition from a growing list of Chinese EV sector competitors like BYD, Huawei, Li Auto, Nio, and Xiaomi both within and outside China. This competition is costing Tesla sales and market share and forcing it to cut prices, offer insurance subsidies, and cash discounts.[x]

The encouraging developments enumerated early on give grounds for optimism. Reflection suggests, though, excess hope is undue. One story attributes recent positive changes to the “sheer force of his [i.e., Musk’s] own personality.”[xi] Give us a brake [sic]! In actuality, it is more likely China is exploiting Tesla to send signals and lobby. The Tesla case signals the outside world and foreign business community that Chinas remains open for business and is internationalist in contrast to the Americans and the Europeans.[xii] Evidencing this, official media lauded the placement of Tesla on the aforementioned Jiangsu Province list as demonstrating China is “inclusive” and gives equal treatment to “‘all countries equally, without any discrimination’” while others have instituted “‘high barriers.’”[xiii] The Tesla case also signals China’s desire for cooperation with the US. During the aforementioned Premier Li and Musk meeting, Li “praised Tesla as a ‘successful model’ for US-China collaboration.”[xiv] Furthermore, the Tesla case signals Beijing’s hope for decent ties with Donald Trump. After all, Musk has endorsed Trump, is reportedly committing huge sums each month to Trump’s reelection campaign, and regularly uses his social media company X to demonize Democrats.[xv] Courting Tesla (Musk) also seems to have made it a defender of the One China principle and an opponent of tariffs Musk once advocated.[xvi]

The Third Plenum of the Central Committee of the Communist Party of the People’s Republic of China, which traditionally has a strong economic focus and has been a platform for reforms, is currently underway. Many are paying rapt attention in hopes of divining where Chinese economic policy will head. The Tesla case covered herein provides one more piece to fill out the interpretive puzzle. It suggests those focused on the Third Plenum are looking in the wrong direction. They should shine their headlights on PRC interests, contextually defined, rather than policy statements or personalities. As one well-known consultant stressed three years ago, “Tesla got this [i.e., its special treatment] because it was in China’s interest for Tesla to have it.”[xvii] This is no less true of other companies.[xviii] In short, businesspeople need to stop “reading the tea leaves” and think deeply how they can make their firms useful.

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