Tesla appears to be making some semblance of progress on its proposed expansion into China. Engadget reported that Tesla has finally secured an 860,000 square-foot plot of land in Shanghai which it plans to use for its first overseas Gigafactory. This factory is supposed to help tap into China’s growing market for new-energy vehicles, a category consisting of electric battery cars and plug-in electric hybrid vehicles – even though the overall automobile market in China is collapsing.
— YUAN TALKS (@YuanTalks) October 17, 2018
Tesla had reportedly signed an agreement with the local government and subsequently confirmed the purchase on its Chinese social media site. The confirmation includes photographs of the signing ceremony of the land transfer agreement.
Tesla did not report the price that it paid for this plot of land, but it was reported by Reuters that it cost about $140 million at auction. And why not bid $140 million for a plot of land in China, especially when you have over $3 billion in payables and negative working capital?
There have been no details released as to how much of this money Tesla needs to come up with now and how it proposes to pay it. Lest we forget that Tesla will then need to come up with an estimated $2 billion to build the factory itself, an amount that the company believes it can get from the Asian debt markets.
This land purchase agreement is the first in what’ll have to be a long list of transactions that Tesla will need to facilitate in order to back up claims that Musk made on the company’s Q2 conference call, when he told Tim Higgins from the The Wall Street Journal that they still intend to make 1 million vehicles in 2020:
Higgins: Do you still plan to make a total of 1 million vehicles in the calendar year of 2020?
Musk: I think so, yeah. If it’s not a million, it’s going to be pretty close. I’d say if it’s not a million it’d probably be 750,000 or something like that in 2020. So, we’re aiming for a million, 2020, but somewhere between half million and a million seems pretty likely.
Higgins: Where do you get the capacity to do that?
Musk: There’s this place called Shanghai.
Just weeks, ago, after Tesla beat its Q3 delivery and production expectations, the company warned about headwinds it was facing in China. In early October, the promising nature of doing business in China looked as though it may have had dimmed a bit, with the company noting that trade tensions with China “have resulted in an import tariff rate of 40% on Tesla vehicles versus 15% for other imported cars in China.”
Tesla continues to lack access to cash incentives available to locally produced electric vehicles in China that are typically around 15% of MSRP or more. Taking ocean transport costs and import tariffs into account, Tesla is now operating at a 55% to 60% cost disadvantage compared to the exact same car locally produced in China. This makes for a challenging competitive environment, given that China is by far the largest market for electric vehicles.
Tesla stated then that the solution to tariffs would be local production, and it said that it was “accelerating construction of [its] Shanghai factory, which we expect to be a capital efficient and rapid buildout”.
There was no word as to whether or not the “funding is secured” for the land purchase or the Gigafactory buildout then, just as there’s no word of it now.