Tesla races to deliver Model 3 in China ahead of tariff hike
Tesla is ‘uniquely exposed’ should Trump and Jinping not agree a trade deal soon, with Elon Musk worrying they’ll hike tariffs back up again
San Francisco — At least three ships about 200m long are slated to arrive at ports in China by the end of this month, each carrying precious cargo from Elon Musk.
Tesla is loading as many Model 3 sedans as it can onto vessels destined for the People’s Republic ahead of March 1, when a trade-war truce between Presidents Donald Trump and Xi Jinping is scheduled to expire. Musk fears the two countries could ratchet tariffs back up, which would make the CEO’s electric cars more expensive in China and boost costs of key components the country sends to his US assembly plant.
Other car makers are at risk of seeing expenses rise again if the dispute between Trump and Xi flares back up, but Musk is in perhaps the most precarious position in the industry. Global giants such as BMW and Daimler can wiggle around the tariffs to an extent by boosting production at existing China factories, but Tesla’s manufacturing presence there was merely a muddy field as of last month. It won’t be assembling any vehicles in China until the end of 2019 at the earliest.
“They’re uniquely exposed,” said Robin Zhu, an analyst at Sanford C Bernstein.
Musk said getting cars to China before a potential increase in tariffs was a key priority when Tesla reported a smaller-than-expected profit on January 30. Higher duties would combine with already elevated transport and labour costs to make the company’s vehicles much pricier than competitors. Plus, imported electric cars aren’t eligible for local tax credits.
“Our car is just very expensive going into China,” Musk said on the earnings call. “The demand for Model 3 is insanely high. The inhibitor is affordability.”
Trump and Xi agreed to a 90-day détente in December. The US said it would delay a planned tariff rate increase — to 25% from 10% — on almost half the goods it buys from China, worth some $200bn. While officials have been negotiating since then, Trump has said he and Xi won’t meet again before March 1.
On Tuesday, Trump said he’s open to extending the deadline if the two sides are near an agreement. China has said its suspension of an additional 25% tariff on US vehicles and parts will apply until the end of March. For months before the truce, China had slapped American-built cars with 40% levies.
Stream of trucks in San Francisco
In recent days, a steady stream of trucks hauling Tesla models has arrived at the gates of Pier 80 in San Francisco, where workers can be seen unloading them into a parking lot packed with thousands of cars. The vehicles then are loaded onto ships for the roughly two-week journey to Asia.
The vessel Glovis Symphony docked at the port of Tianjin early this week and is due to arrive in Shanghai on Wednesday. Two more carriers, Morning Cindy and Emerald Ace, are at sea and scheduled to reach China’s shores on February 19 and 24, respectively, according to data compiled by Bloomberg. Other ships being loaded at Pier 80 are headed to Europe.
Musk has a case to make that Tesla punches above its weight on trade. While researcher Autodata estimates the car maker’s US market share was only about 0.7% last year, US Census Bureau data suggests the company may account for almost 16% of vehicle exports by value
The Model 3 is the linchpin of Tesla’s effort to appeal to a wider global audience, with Musk promising for years that a version eventually will be available for $35,000 before incentives. That’s generally in line with the average selling price of a vehicle in the US.
However, following through on that vow has bedeviled Musk. The cheapest version available now — almost three years since he first showed a concept of the car — is $42,900. In Europe, where deliveries are just getting underway, prices vary by country, with customers in Belgium paying a base price of €58,800, compared with €55,400 in Germany and €53,500 in France.
In China, the Model 3 starts at 433,000 yuan ($63,900). Some of the best-selling electric cars in the market — the world’s biggest for battery-powered vehicles — can be had for less than a sixth of that price. Beijing Electric Vehicle’s EC Series and Chery Automobile’s Q are listed at 65,800 yuan after subsidies.
US-China trade war
The US-China trade war risks making the Model 3 costlier worldwide. In addition to the possibility of Xi’s administration re-imposing higher tariffs on American vehicles, Trump’s levies could make it more expensive for Tesla to source key parts.
Tesla asked the Trump administration for a tariff exemption on the Model 3’s computer, which is made in China and essentially acts as the brain of the car, overseeing everything from the touch-screen display to the advanced driver-assistance system, known as Autopilot.
The US trade representative’s office has been reviewing whether the product is available only from China and whether higher tariffs would severely hurt the company or US interests. Tesla argued as much in its request, filed in August.
Musk has a case to make that Tesla punches above its weight on trade. While researcher Autodata estimates the car maker’s US market share was only about 0.7% last year, US Census Bureau data suggests the company may account for almost 16% of vehicle exports by value.
In 2017, California shipped $1.37bn worth of electric vehicles to China, according to the bureau’s foreign-trade statistics. Up to October 2018, the figure was $936m. Virtually all of those cars were Teslas.
If the trade war escalates further, Tesla could shift part of its supply chain to other countries in Asia, or to Mexico where it already has several established suppliers. The company also is working closely with government officials in Shanghai to build a vehicle and battery factory. Musk said he expects to make several trips to China this year.
“We’re thinking about demand almost zero right now,” Musk said during the earnings call. Getting cars to China before there’s a potential rise in tariffs is “really on top of mind”.