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Tesla Production Heads to China: Bull and Bear Case Explained


Tesla had been wanting to produce cars in China for some time. Trump's tariffs may have sealed the deal.

Supposedly, the factory will be capable of producing 500,000 cars a year. We have seen this kind of hype from Elon Musk before.

Although the numbers may be questionable, the deal itself isn't.

Money Needed

The preliminary agreement is a major development in Tesla's more than yearlong effort to open China's first production facility that will be wholly owned by a foreign carmaker. But the absence of detail about the size of the investment is turning heads because the Musk-led company had just $2.7 billion in cash at the end of the first quarter. Tesla has been burning through billions of dollars as it's struggled to ramp up manufacturing of the Model 3 sedan.

"The biggest question right now for investors -- bulls and bears alike -- is how are they going to pay for it," Ben Kallo, a Robert W. Baird & Co. analyst with the equivalent of a buy rating on Tesla shares, said in a Bloomberg Television interview. "They will have to get capital."

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

Service Question

How the heck do those Tesla China owners get service? It takes months here to get service. How long does it take in China?

And production in China has to be at least a year away.

Will china be the new producer of parts?

Funding Question

Baird asks: How are they going to pay for the new factory? "They will have to get capital."

Let's return to the WSJ article for a possible answer.

Local Capital

Tesla does have at least one local ally, with internet giant Tencent Holdings Ltd. having spent $1.7 billion on a 5% stake in the electronic-vehicle maker last year, and raising local capital to help build the Shanghai plant shouldn't be a problem.

"If there were an opportunity for Chinese investors to go into Tesla, they'd do it in a heartbeat," Mr. Chao said.

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