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PRINT EDITION
As tariff war builds, Tesla turns to China
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Wednesday, July 11, 2018 – Page B1

Tesla Inc. has reached a preliminary agreement with the Shanghai government to build a factory that will rival production from its lone U.S. assembly plant, as Elon Musk takes his biggest step yet to expand overseas.

Construction will begin soon, after securing needed permits, and it will produce 500,000 electric vehicles a year for Chinese consumers in two to three years, the company said in a statement. While Mr. Musk, 47, said more than two years ago that he expected Tesla would produce that many vehicles a year from its lone car plant in California by 2018, the company is well off that pace because of slower-than-expected output of the Model 3 sedan.

The memorandum of understanding is a major development in a more than yearlong effort by Tesla to open China's first production facility to be wholly owned by a foreign car maker. Work toward getting the factory built has gained urgency as Donald Trump engages in a trade war that's ensnared imports of the company's vehicles into China. Tesla follows Harley-Davidson Inc. in charting plans to expand outside the United States to circumvent tariffs that have surfaced amid the U.S.

President's escalating trade disputes.

BMW AG, meanwhile, said it will make Mini cars in China for the first time, sealing a joint-venture agreement to produce electric vehicles with partner Great Wall Motor Co. in the world's largest automotive market.

The 50-50 owned venture will make battery-powered vehicles for both partners at a new plant in Jiangsu Province, BMW said in a statement Tuesday.

The expansion is the German luxury car maker's second this week in China, part of a parade of accords announced at a Berlin summit with Chancellor Angela Merkel and Chinese Premier Li Keqiang in attendance.

"Today's signing represents a new level of cooperation between China and Germany," BMW chief executive Harald Krueger said in the statement.

Creation of the venture, called Spotlight Automotive Ltd., coincides with China's April decision to ease foreign-ownership restrictions in the country, with the possibility that Western automakers could eventually buy out their local partners.

On Monday, BMW agreed to lift output at a separate venture with Brilliance China Automotive Holdings Ltd. that will lessen the sting of higher Chinese import tariffs on its U.S.-made SUVs.

The company sold 560,000 BMW brand vehicles to customers in China in 2017, more than the United States and Germany combined. China was Mini's fourth-largest market, with around 35,000 units delivered, it said.

Tesla, the youngest publicly held U.S. automaker, is looking to expand its capacity and more efficiently reach global markets. Tesla's lone car-assembly plant is in Fremont, Calif., where it's built about 88,000 cars through the first half of this year, and it has a giant battery factory in neighbouring Nevada. After moving ahead in China, the world's largest market for electric vehicles, Tesla has said it will reveal plans toward the end of 2018 to build a plant in Europe.

Tesla said a year ago it was working with the Shanghai government to explore local manufacturing. Since then, production in China has become even more crucial: Last week, in response to tariffs imposed by the United States, China increased the import duty on U.S.-made cars to 40 per cent, prompting Tesla to raise prices. A plant in China also reduces shipping costs and potentially makes sourcing components more economical.

The company has boosted prices of Model S sedans and Model X crossovers in China by as much as US$30,000 after Beijing imposed additional duties on American-built autos, putting its vehicles beyond the reach of more consumers in its No. 2 market globally.

In November, Mr. Musk said Tesla is about three years away from starting production in the world's largest auto market.

At the time, he suggested the plant would supply China and potentially other parts of Asia with a couple hundred thousand vehicles a year - less than half the new projection. Tesla probably will make the smaller Model 3 sedan and forthcoming Model Y crossover in China, he said then, rather than the pricier Model S sedan or Model X sport utility vehicles, which often sell for more than US$100,000 in the United States.

China presents a massive growth opportunity for Tesla and rivals such as BMW and Daimler AG, which are seeking to take advantage of a massive and fast-growing market for new-energy vehicles. That category, which includes battery-powered, plug-in hybrid and fuel-cell automobiles, reached 777,000 units last year and could surpass one million this year, according to estimates by the China Association of Automobile Manufacturers. The government's target is seven million vehicles a year by 2025.

Tesla sold 14,779 vehicles in China last year, according to data from LMC Automotive. That gave it about 3 per cent of the country's battery-powered electric-vehicle market, placing it as the No. 10 brand in that segment. China accounted for 17 per cent of Tesla's 2017 revenue, according a filing with U.S. regulators.

"Tesla is deeply committed to the Chinese market, and we look forward to building even more cars for our customers here," the company said in a statement.

TESLA (TSLA)

CLOSE: US$322.47, UP US$3.96


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