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11 min read . Updated: 05 Dec 2021, 11:17 PM IST To attract Tesla, the government rewrote its rules for foreign auto businesses, but now, the company is entering bumpier terrain
With the US tightening technology exports to China in 2018, President Xi Jinping defiantly pledged to make China the world’s future innovation and industrial center. Key to his plan was Elon Musk.
Mr. Xi viewed the South African-born entrepreneur as a technology utopian with no political allegiance to any country, according to officials involved in policy-making, and saw his Tesla Inc. as a spearhead that could make China a power in new-energy cars.
Mr. Xi rewrote the rulebook to allow foreign companies sole ownership of auto ventures so Mr. Musk would open an electric-vehicle factory in Shanghai. Authorities showered him with cheap land, low-interest loans and tax incentives, expecting in return that Tesla would groom local suppliers and bolster lagging Chinese electric-vehicle players, say people with knowledge of the talks between Beijing and the company.
Today Tesla likely makes more than half its vehicles in China, suggest calculations based on the company’s third-quarter production and delivery figures and China Passenger Car Association data. Chinese sales helped propel Tesla to its first full year of profitability in 2020 and provided roughly a fourth of Tesla’s revenue in the first nine months of 2021. Mr. Musk, meanwhile, has cemented his place as the world’s wealthiest person.
But Tesla is facing an increasingly difficult business environment in China now. It has drawn wrath from domestic rivals over what they see as preferential treatment, suffers criticism of its vehicle quality from drivers and Chinese officials, and has been caught up in the government’s sweeping crackdown on big tech.
China is pressing foreign companies to meet an ever-more-stringent policy on data security. Tesla now must retain inside the country all digital records gathered from local customers, and it must ask authorities for approval before updating certain software on cars in China.
Mr. Musk’s response to the pressure has been to become a high-profile cheerleader of China’s ruling Communist Party, in sharp contrast to his renegade persona in the U.S., where he has clashed with the Securities and Exchange Commission and mocked President Biden in tweets, once calling him a labor union sock puppet.
“The economic prosperity that China has achieved is truly amazing, especially in infrastructure!" Mr. Musk tweeted when the party celebrated its centenary on July 1.
Mr. Musk has hailed China’s toughened data laws, and his company issued a humbling apology in April. A driver at an auto show publicly blamed Tesla brakes for an accident, after which China’s top legal-affairs agency chimed in, calling the company arrogant. A short time later, Tesla said on China’s Twitter-like Weibo platform: “We apologize for failing to resolve the problem of the car owner in time. We will try our best to learn the lessons of this experience."
Tesla thus finds itself falling within a familiar historical pattern, in which Beijing uses a grant of access to its vast market to advance China’s own industrial capability.
After Apple Inc. brought its iPhone supply chain to China years ago, many of the Chinese companies Apple trained also became suppliers to Chinese smartphone manufacturers, which now lead the world in sales.
Apple has a healthy 11% market share in China. But another Western tech giant, Microsoft Corp., which first opened a China office in 1992, now finds itself hamstrung by the country’s nationalism in areas such as cloud storage. Microsoft recently said it would shut down the localized version of its LinkedIn platform in China, citing the challenging operating environment.
“China’s game isn’t to let Tesla win," said Bill Russo, founder of Automobility, a Shanghai-based consulting firm. “China’s game is to make the domestic industry compete."
The Information Office of the State Council, China’s top government body, didn’t answer questions for this article. Mr. Musk and Tesla didn’t respond to requests for comment. Microsoft said it would continue to have a strong presence in China. Apple didn’t respond to a request for comment.
From the outset, officials in Beijing made clear they wanted something in return for throwing open the country to Tesla, according to the people with knowledge of the parties’ 2018 talks.
Chinese leaders had grown frustrated with domestic electric-vehicle companies’ performance and saw Tesla as an opportunity to reset the country’s auto industry. Tesla would be expected to localize its supply chain and groom Chinese manufacturers, steps that could accelerate the domestic industry.
Miao Wei, who negotiated on the deal with Mr. Musk, openly discussed how Tesla could propel underachieving local EV startups. He likened it to lobbing a predatory catfish into a pond full of sluggish fish. Representatives for the Ministry of Industry and Information Technology, which Mr. Miao then led, didn’t respond to questions.
Mr. Musk long expressed interest in a plant in China that would help Tesla sell cars for less in the world’s largest auto market, but he didn’t want to take on a Chinese partner in a joint venture as other foreign auto makers had.
In July 2018, Tesla signed a deal to build a factory in Shanghai. Chinese authorities lauded the deal for the jobs it would create and for the roughly $345 million in annual taxes Tesla is expected to start generating at the end of 2023, according to regulatory disclosures. Beijing’s embrace of Mr. Musk was so warm that at a meeting in 2019, Premier Li Keqiang offered to give him a “Chinese green card." Mr. Musk let the premier take a Tesla for a spin within the gated Zhongnanhai leadership compound.
Some at Tesla bristled at aspects of the push into China, concerned about issues including a risk of intellectual-property theft, a person familiar with the matter said.
As in the West, Tesla’s arrival whetted people’s interest in electric vehicles. The 2019 launch of the made-in-China Tesla Model 3 helped convince consumers such vehicles were a viable alternative to gasoline cars.
Tesla proved an effective “catfish," too: Its Chinese-made cars restored the confidence of Chinese investors in the electric-vehicle market, helping supercharge domestic startups that had struggled.
NIO Inc., for instance, was close to collapse but secured investment in April 2020 and saw a revival in its share price that led to further fundraising. It has thrived in Tesla’s slipstream, as have two Chinese peers that sell premium electric vehicles, Li Auto Inc. and XPeng Inc. The three companies’ electric-vehicle sales are likely to total more than 270,000 this year, up from around 12,000 in 2018, according to a forecast by consulting firm ZoZo Go LLC.
“Pre-Tesla, nobody believed that a Chinese brand could be riveting," said Michael Dunne, chief executive of ZoZo Go and a former General Motors Co. executive. ZoZo Go expects overall sales in China of new-energy vehicles—including electric and plug-in hybrid vehicles—to be roughly 3.1 million this year, more than double last year’s.
A spokeswoman for NIO said the company appreciates Tesla’s efforts to spur the development of the electric-vehicle industry.
The Tesla effect also lifted the supply chain, meeting a key goal of China’s leaders. Tesla has sent engineers to train workers, help with design and research and impart know-how at firms ranging from a battery maker to die-casting processors.
In early 2021, Tesla said it had reached a “domestic supply sourcing ratio" of over 90% at its Shanghai factory. Tom Zhu, its top China executive, has said Tesla is on track to source all of its vehicle components locally by year-end.
“There were previously a ton of parts that were made in other parts of the world that were being shipped to Shanghai," Mr. Musk said in a July 2020 earnings call. “Just locally sourcing those components makes a massive difference to the cost of the vehicle."
Tesla engineers worked with Chinese battery maker Contemporary Amperex Technology Co. Ltd., known as CATL, to tailor products to Tesla’s needs. A 2020 supply deal with Tesla affirmed the company’s place as a top-tier battery maker.
A supplier of housings for components and hydraulic systems relies on Tesla for roughly half its business. Ningbo Xusheng Auto Technology Co. said in its 2020 annual report that through its cooperation with Tesla, it has “accumulated technologies relating to the design, R&D and production of electric-vehicle parts," helping it “occupy a top position in the electric-vehicle parts industry." Ningbo’s 2020 revenue tripled its 2016 level.
Rival electric-vehicle companies in China are now taking aim at Tesla, many of them unhappy about what they perceive as officials’ preferential treatment of a foreign car maker. Some rivals have done so by leveraging Beijing’s broader clampdown on how data is handled by tech behemoths.
They include a company called 360, which started out as a cybersecurity firm, and state-owned vehicle giant SAIC Motor Corp. The two companies in March urged China’s legislature to address national-security concerns associated with foreign electric-vehicle makers. Their target was Tesla, according to people with knowledge of the discussions between the companies and officials.
Zhou Hongyi, 360’s founder, suggested that China adopt laws and regulations limiting the collection of geographic information from users of electric vehicles, according to state media reports. State media also said Chen Hong, SAIC’s Communist Party secretary and chairman, proposed that the collection, storage and commercial use of data collected by these vehicles be filed and managed by the Chinese government.
Media representatives at 360 and SAIC didn’t respond to inquiries.
Beijing restricted the use of Tesla cars on military bases and other sensitive government premises. Aided by a public backlash against Tesla, triggered by the driver’s complaints in April, the government in May proposed strict regulations on automotive data collection, limiting the kind of data electric-car makers could collect and forbidding them to transfer outside China any information gathered from users on China’s roads and highways.
These proposals became final in August, as per formal guidelines issued by the Ministry of Industry and Information Technology then. A personal-data protection law that took effect on Nov. 1 could further restrain the company’s ability to gather digital information from Chinese consumers.
The new requirements likely will make it harder for Tesla to develop and deploy autonomous vehicles in China, because these rely on an array of sensors that collect vast amounts of data, according to analysts and current and former industry executives. Tesla’s current driver-assistance features don’t make vehicles autonomous.
“The sweeping data regulation was intended, at least in part, to address escalating public debate about Tesla," said Paul Triolo, head of global technology policy at Eurasia Group, a New York-based consulting firm, who consults with Chinese officials.
A sore point for local rivals of Tesla is a government policy aimed at encouraging auto makers to produce more electric vehicles. Companies that don’t build enough must purchase credits from those that do. Tesla has been one of the chief beneficiaries of this rule.
“A lot of Chinese companies are very upset by the system," said Scott Kennedy, a China expert at the Center for Strategic and International Studies, a Washington think tank.
Tesla has used savings from having domestic suppliers to hold vehicle prices low enough for buyers to qualify for Chinese government subsidies. In July, Tesla launched a Model Y compact sport-utility vehicle that costs less than 300,000 yuan (about $47,000), enabling buyers to get these subsidies.
The Shanghai plant now is Tesla’s main export hub and helped the company introduce its Model Y to Europe, Chief Financial Officer Zachary Kirkhorn told investors in October. The factory makes more vehicles than Tesla’s plant in Fremont, Calif., Mr. Musk said in October, and underpinned the company’s record global deliveries in the third quarter.
Long term, Tesla is likely to lose ground in China to domestic competitors, industry analysts say. Earlier this year, Morgan Stanley analysts forecast that Tesla would make up roughly 15% of China’s all-electric vehicle market this year but that this would fall below 7% by 2030 as homegrown companies gain traction.
“Tesla’s position in the domestic Chinese market will be substantially diluted over time through competition and policies to encourage local players," the analysts said.
Mr. Musk remains personally popular in China, where people accustomed to conformity admire his maverick behavior in the U.S. Aspiring Chinese tech entrepreneurs look to him for inspiration, tracking moves of the “Silicon Valley Iron Man." Some Chinese businesses have even trademarked products using the Chinese translation of his name, Ma Si Ke.
Mr. Musk may have to settle for a sizable, though not dominant, position in the Chinese market, some analysts suggest. Tesla sold more than 73,000 vehicles in China in the three months ended in September, not including exports, a record quarterly performance, China Passenger Car Association data show. Yet in a recent survey of roughly 1,600 Chinese consumers, Tesla ranked among the top auto brands to avoid, signaling that the company could be hitting a ceiling on market share, Bernstein Research analysts said.
Mr. Musk has maintained his deferential tone. In September, when China held an internet conference aimed at pushing its alternative version of the web—at a time when the government was pressing a regulatory crackdown on tech—not many of the country’s tech stars attended.
Mr. Musk spoke via video, describing how Tesla had set up a data center in China to store the digital records gathered from its production, sales, service, charging and other activities in the country.
“At Tesla, we’re glad to see a number of laws and regulations that have been released to strengthen data management," Mr. Musk said.
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