How Elon Musk’s ambitions for Tesla in China hit the skids

Tesla CEO Elon Musk (left) speaks to Chinese Premier Li Keqiang - MARK SCHIEFELBEIN/AFP via Getty Images
Tesla CEO Elon Musk (left) speaks to Chinese Premier Li Keqiang - MARK SCHIEFELBEIN/AFP via Getty Images

Qin Gang, China’s ambassador to the US, was full of praise for Elon Musk after sharing a ride with him in a Tesla Model S.

“Had an inspiring talk with Elon Musk today,” Gang tweeted in March, adding the two had covered topics such as the “meaning of life on Earth and our future in space.”

It was the latest move in Musk’s long-running charm offensive in China. Earlier this year, the Tesla founder even went as far as writing a column for a magazine run by China’s official state censors, despite his insistence on being a “free speech absolutist”.

“I welcome more like-minded Chinese partners to join us in exploring clean energy, artificial intelligence, human-machine collaboration, and space exploration,” he wrote.

For a while, such flattery seemed to pay off. Tesla managed to achieve what no other foreign carmaker had previously been able to: set up a Chinese factory without being forced to partner with a local company.

But now, Tesla’s China dreams are getting a reality check. This week, it was reported that the electric car maker could cut production at its flagship Shanghai factory amid waning demand. Tesla China called the reports “false”, but not before shares slipped 7pc.

Meanwhile, Reuters reported on Friday that the carmaker would suspend Model Y assembly at its Shanghai plant between December 25 and January 1.

“Tesla increasingly appears to have a demand issue,” says Bernstein analyst Toni Sacconaghi. “We believe that Tesla may need to take additional price cuts in 2023 in China to stimulate demand.”

China represents the world’s largest electric car market with roughly 3 million new registrations in the year to October.

Musk was able to open the company’s Shanghai Gigafactory in 2019, just 168 days after securing a permit to build the sprawling facility.

The factory is now on track to build more than a million Tesla cars this year. It shipped a record 100,000 cars in November.

Aerial view of Tesla Shanghai Gigafactory - VCG via Getty Images
Aerial view of Tesla Shanghai Gigafactory - VCG via Getty Images

Production has soared despite repeated lockdowns. Tesla kept staff working at the factory, isolated from the outside world in a “closed loop” system, during the worst of China’s Covid outbreaks.

Such was the success of Tesla’s rapid growth in Shanghai that Musk roped in Tom Zhu, the company’s Asia chief, to help ramp up the company’s Giga Texas plant to produce its Cybertruck.

Despite that record, Chinese registrations of new Tesla cars dipped month-on-month, according to data from the China Passenger Car Association.

They fell around 13pc to 62,493 in November, even after Tesla cut the price of its entry level Model Y car to $43,000 for Chinese customers.

It is now playing catch-up to domestic giants. Earlier this year, China’s BYD dethroned Tesla as the world’s leading electric vehicle company by sales. In the three months to September, BYD sold 537,000 cars globally, an increase of 187pc, compared to Tesla’s 343,830 – an increase of just 43pc but still missing analysts' forecasts.

On Thursday, Bloomberg reported Tesla’s Shanghai plant would cut back the length of shifts and freeze hiring.

Dan Ives, a Wall Street technology analyst, says: “Tesla is clearly seeing some demand issues in China as the recession and lockdown cramps the consumer.”

Beijing, meanwhile, has placed restrictions on Tesla cars due to spying fears, including barring them from sensitive government sites or events.

Tesla executives must also grapple for Musk’s attention. As well as running social network Twitter, which he acquired in a $44bn deal, the billionaire leads rocket company SpaceX, brain-chip company Neuralink and tunnelling company The Boring Company.

BYD Atto 3 electric sport utility vehicle - China News Service via Getty Images
BYD Atto 3 electric sport utility vehicle - China News Service via Getty Images

Musk has said he works 120 hours per week and regularly hops on private jets for “red eye” flights across the US between key meetings.

“China is the heart and lungs of the Tesla growth story and this news continues to weigh on the stock, along with the Musk Twitter circus show,” Ives says.

Musk has sold around $36bn in shares to fund his Twitter buyout, and Tesla shares are down around 57pc this year. Musk even briefly lost his spot as world’s richest man last week to French billionaire Bernard Arnault.

There remains hope, however. President Xi Jinping's plans to gradually reopen China’s economy, despite fears of a huge surge in omicron Covid cases, could benefit the US car maker.

The domestic market also remains huge and EVs still benefit from government grants for buyers. Pedro Pacheco, an analyst at Gartner, says: “Overall, the Chinese market is very strong in what comes to EV demand due to more attractive incentives rolled out by the Chinese government.”

However, Matthias Schmidt, an independent automotive analyst, says there is “worrying evidence of a slowing Chinese EV market in 2023” as subsidies for car-buyers are gradually withdrawn.

More unnerving for Western carmakers such as Tesla is that China’s EV beasts are now setting up shop in Europe. BYD is planning to build its own European plant and launch several models next year as China’s EV makers “expand their electrically powered juggernaut as the domestic market comes off the gas,” Schmidt says.

After racing ahead of Chinese rivals, Tesla’s China strategy appears to have hit the skids.