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Elon Musk Drives Tesla Straight into China Trap

Elon Musk socialist (Mark Brake / Getty)
Mark Brake / Getty

Elon Musk wants to be a groundbreaker in China.

Instead, he may end up being broken by China.

Tesla signed an agreement last week with the government of Shanghai to open what is being billed as the first foreign wholly-owned manufacturing plant in China. It is also Tesla’s first factory outside the U.S., which will supposedly have a capacity to build 500,000 cars a year.

Musk has lately billed himself as the embodiment of President Donald Trump’s efforts to revitalize America’s manufacturing base. And the U.S. government has been sharply critical of China’s demands that U.S. companies operating in China partner with a Chinese firm that owns more than half of the business. According to the U.S. government, this is one of the principal tactics China uses to steal U.S. technology.

Has Tesla finally broken out of the “China First” cage?

That looks unlikely, based on what we know so far. Tesla lacks the capital to fund the investment itself, and the details were not disclosed. But, in a briefing last week, a Shanghai government official told Bloomberg that any sharing of technology would be “subject to negotiations.”

China has made no secret of its ambitions to dominate electric car manufacturing. Its leaders have touted this as a goal and it forms a significant part of China’s infamous “China 2025” industrial plant. Getting ahold of Tesla technology would be a major coup for China.

Tesla has plenty of critics in the U.S.: It relies on subsidies from the U.S. government, its investors often seem like they are in a cult of personality, the CEO often appears unfocused, and the balance sheet is opaque in areas where it seems stable and unstable where it is clear.  (Full disclosure: I invested a few hundred dollars in an early banking company run by Elon Musk and was never able to figure out how to get my money back.)

Bloomberg columnist Anjani Trevedi points out the problem:

Access to China is a panacea of sorts for the spirited electric carmaker, but Musk is entering with a weakened position. On Tuesday, Tesla also signed an electric vehicle investment agreement with Shanghai’s Lingang Management Committee, the Lingang Area Development Administration and the Lingang Group. A development and innovation center will also be set up. In theory, this is where a technology transfer could happen, even without a joint venture company.

That would defeat the purpose of having a wholly owned enterprise…

The Shanghai government also suggested it could pony up capital and help Tesla with the construction of its factory to get it running as soon as possible. Estimates for a Model 3 production line range between $3 billion and $5 billion. At its current burn rate, Tesla sure doesn’t have that kind of capital at its immediate disposal. A Tesla spokesperson said construction is expected to start soon, “after we get all the necessary approvals and permits.” It would be around another two years before cars start to roll off the assembly line and then a further two to three years to ramp up to full capacity.

In short, Elon Musk may think he’s blazing a new trail for U.S. manufacturing in China. But he may just be another sucker buying a bridge across the East River into Brooklyn.

 

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