Business

Tesla’s Move To Corner China’s Electric Vehicle Market Could Cost Them

Tesla might have to accept China’s absurdly high economic tariffs if the company wants to gain a major foothold in the communist country’s electric vehicle market without giving up any important business secrets.

Manufacturers must either take up a joint venture and share technology with a Chinese company within the country or prepare to fork over steep tariffs while protecting their trade secrets. Most manufacturers take the former method to avoid tariffs, but Tesla has chosen a variation on the second option.

The company has accepted a preliminary deal allowing Tesla to build its own manufacturing facility within a free trade zone, anonymous sources told The New York Time Sunday. Tesla would still be subject to China’s nearly 25 percent tariff on imports – it’s a high rate compared to U.S.’s 2.5 percent and the European Union’s 9.8 percent.

China has the world’s largest electric vehicle market. Consulting firm LMC Automotive estimates that nearly 300,000 electric cars will be sold in China in 2017, while the rest of the world has sold combined total of 287,000. Their dominance in the market is due almost entirely on China’s massive subsidies to green energy companies.

“China is and will be the largest consumer and producer of electric vehicles in the world,” said Bill Russo, the chief executive of Automobility, a consulting firm located in Shanghai. “If Tesla hopes to compete as a global electric vehicle maker, it must tap the manufacturing and supply footprint of China in order to compete globally.”

Tesla is heavily dependent on subsidies for its existence. The subsidy train could end sooner rather than lather, though, as China is already struggling to pay out billions of yuan in subsidies to clean energy companies.

The total shortfall by 2020 will be $30.2 billion, a dramatic increase from $7.5 billion last year, Dongming Ren, director of the National Development and Reform Commission’s Energy Research Institute, said at an industry conference earlier this year. Electric vehicle sales plummet wherever subsidies and tax credits for ownership are nixed.

Tesla cars registered in Hong Kong, for instance, tumbled from nearly 3,000 in the month of March to zero in April after the government cut a tax break for electric cars April 1, according to a report earlier this year from The Wall Street Journal.

Registration numbers are the best datasets available to approximate actual cars sold in the country. Neither Hong Kong nor Tesla publish real numbers of Tesla cars sold in the country.

After Hong Kong authorities trashed the tax break, the price of a basic Tesla Model S four-door car in the country skyrocketed nearly 60 percent from around $75,000 to $130,000. Overall, the price of Tesla cars in Hong Kong rose almost 100 percent, a Tesla representative told Business Insider.

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