Is It Worth for Tesla to Add a Production Plant in China?

Is it worth for Tesla to add a production plant in China?

According to recent news, Tesla reported that it would be looking install a production plant in Shanghai, China. However, an American company looking to open a business in China must have a Chinese partner. ^[1] The following content in this paper will analyze whether the move to produce in China makes sense for Tesla. Some important variables that will have an impact on this decision are the following. How does the electric car demand look globally? How do the production costs vary from making in US vs China? What challenges will Tesla run into in China? Will competitors, market share, regulations, trade barriers be an issue for Tesla? After going over those questions I will outline a recommendation and share my conclusions.

        Currently Tesla has a model S production facility in Fremont, California with the capacity to produce 80,000 cars a year with 6000 workers as of 2016. ^[2] The building is about 500,000 square feet. The facility currently produces three models, the Model S, Model X and recently added Model 3. That same year the Model S sold over 158,000 units sold, with 25,524 units sold for Model X, and Model 3 is expected to have a volume of around 5,000 per week. Even though Tesla has its production facility in California, it has around 25% of its units sold internationally. The facility uses more than 160 robots including 10 of the largest robots in the world.^[3] Each vehicle has a lead time of 2-3 months from the time the order is placed.^[4] Tesla’s preferred method of delivery is via train rather than truck since the cost and damages are less.^[5] 

Current production costs of making an electric car in the US are quite high. In the case of the Nissan Leaf, just the battery production cost in the U.S. alone can range from $16,000-$20,000. Nissan reported that the price of a Nissan Leaf is at $33,000 leaving almost no profit margin for Nissan.^[6] A similar car, the base model of the Chevy Volt is estimated to be a cost of $28,700 for the production cost. While the new model Tesla 3 is expected to be $29,878 the option of adding extras to the car brings that up to a better price for Tesla.^[7] It is important to note that over time the expected cost to produce an electric car will be less costly and eventually cheaper than an internal combustion engine vehicle.

        Tesla currently has 1 Gigafactory in Nevada. The name “Gigafactory” comes from Tesla’s planned battery production amount per year of 35 gigawatt-hours(GWh). In number terms, “giga” is a measurement unit that represents “billions”; one GWh is the same as one billion watts for one hour.^[8] Tesla was certain that building a Gigafactory was key to reducing the production cost for their electric vehicle and powerpack packs by 30%. In addition, one of Tesla’s goals is to expedite the transitioning of global sustainable transportation. To do that Tesla expects to have the capacity to make 500,000 electric cars per year. This will require a huge supply of lithium ion batteries. Tesla plans on achieving a target for battery cost at $100/kWh by 2020. To do this economies of scale and manufacturing efficiency improvements through the Gigafactory program will help.^[9] That goal may very well be obtainable since they are just below $190/kWh in 2017, when estimates said it would be 2020 before that price on battery cost would occur.

 In fact, Tesla’s CEO Elon Musk stated during the National Governors Association 2017 Summer meeting that Tesla had picked out the United States for at least two possibly three locations where it would build its Gigafactories. Those Gigafactories would be responsible for the manufacturing process of Tesla’s fleet of the Model 3, Model S, Model X, future Model Y and the next generation roadster, but also Tesla’s PowerPacks. Elon Musk stresses that it will be a large component of the business plan as Tesla wants to improve its long-scale plans to include production of 150 gWh, which is enough to power over 1,000,000 electric vehicles per Gigafactory worldwide.^[10] These gigafactories do not come at a low cost. The first one came at a $5 Billion cost but providing 10,000 jobs.

        On the other side of the world, in the city of Ningde lies the headquarters of Contemporary Amperex Technology Ltd (CATL), China’s fastest growing battery maker. With the ability to make 7.6gWh batteries last year, CATL expects to produce more than the first gigafactory in Nevada. Due to aggressive government policies including subsidies for electric vehicles to restriction on foreign rivals, China’s battery companies are beginning to dominate an industry that has been led by South Korean and Japanese manufacturers.^[11] China is leading the world by having 55% of the world’s lithium-ion battery production in 2016. That number expects to increase to 62% by 2020.^[12]

One can suspect that in China the production costs to make an electric vehicle might be a lot lower than in the U.S. While the U.S boasts popular electric vehicles like the Chevy Volt, the Nissan Leaf and the Tesla model S, China’s electric vehicle market is heavily dependent on what they call the LSEV(low speed electric vehicle).^[13] The LSEV cars use a basic battery that is not nearly as expensive as the U.S batteries. The LSEV cars can go up to 40 miles per hour and cost as little as $5,000. Another reason to suspect that it is less costly to produce electric vehicles in China is the demand for it is at least double than the U.S.

BYD, the world’s biggest electric vehicle maker is the prime example of how a company from China can keep production costs low. With cheap labor, BYD developed a semi-automated production system. After using a copy cat system BYD produced the F3 sedan for $6,000. This car went for half the price of a Toyota Corolla.^[14] It became the best-selling car in China, outselling cars from Volkswagen and Toyota. A big cost of making an electric vehicle comes in the battery. China has a big advantage to cut costs in making batteries since government provides substantial subsidies to Chinese battery makers. However, the government has a list of approved Chinese battery makers. Another key advantage that China has over the U.S is the accessibility to raw materials. Many Chinese companies have been investing in lithium-ion supply chain and often buying cobalt and lithium mine assets. ^[15]