Tesla could be in a world of hurt from the brewing trade war with China, suggests a NBC News report. The Trump Administration is launching a trade war against the rest of the world (more or less), where China is a primary target, a move which is upsetting business plans that have been years in the making. Lots of companies have supply lines that source components from outside the USA, and those supplies are now at risk, as is the revenue of companies which export products into countries that are now considering retaliatory trade measures because of unilateral moves by the Trump Administration. Tesla has a large exposure to China and to European sales, which can threaten Tesla’s survival possibly.
For example Mid Continent Nail Corporation, one of the largest nail manufacturers in the USA, located in Poplar Bluff, MO, is very likely to have to close its business before the fall. The cause is not any failing of the management, and instead rests solely on the Trump Administration playing fire with tariffs on goods from China. China’s retaliatory tariffs means a 25% hike in the price of steel, meaning Mid Continent Nail Corporation is no longer competitive.
Another example is the plight of Harley Davidson. A few days ago the company announced a plan to shift some manufacturing overseas, again because of the new system of tariffs being enacted by various countries in response to Trump Administration tariffs. Pres. Trump apparently feels betrayed by this move, and has threatened Harley Davidson with punitive taxes on anything it tries to import back into the USA.
FWIW Harley Davidson is still reportedly planning to build an electric motorcycle one of these years. We know nothing beyond that.
What NBC News suggests is that: Tesla could be collateral damage in Trump trade war with China
It’s not a matter of the Trump Administration trying to destroy Tesla. It’s that they’re not thinking through the impact of these moves.
Tesla has worked long to get into the Chinese market, having built a sales organization there, as well as a Supercharger network. But Tesla faces an adoption hurdle in China, because of that country’s 25% tariff on goods imported into China. As a result, Tesla is looking to set up manufacturing facilities in China just as Tesla is looking to set up a Gigafactory or two in Europe.
Positioning manufacturing on the same continent that products are sold is, in my opinion, a good thing. First, it avoids import duties and money exchange fees and other trade barriers. Second, the economic impact of shipping a product a few thousand miles by rail is a lot less than shipping the product overseas by cargo ship.
The NBC News report suggests there is a risk the Trump Administration will limit Chinese investment in USA companies. Especially companies with high-tech products, like Tesla. The problem is that under current Chinese law, a non-Chinese company setting up shop in China must do it in partnership with a Chinese company. In other words, Chinese law requires that Chinese companies invest in joint venture companies. A requirement that would run afoul of expected Trump Administration moves.
Rumors have been swirling in recent days that Treasury Secretary Steven Mnuchin is working up a plan to restrict Chinese investments. On Wednesday, he told CNBC, “We are not singling out China, but we will protect technology transfer to China as we will to other important areas.”
“We will have the necessary tools to protect investments, whether it’s China or anybody else,” Mnuchin said.
An issue is the endemic problem of information leakage when partnering with Chinese companies.
Through their joint ventures with foreign manufacturers, Chinese automakers have been able to gain access to their partners’ technology, using it to make themselves increasingly competitive. Meanwhile, foreign automakers have long groused that they find little relief from China’s courts when trade secrets and intellectual property are illegally appropriated by Chinese competitors.
The NBC report is light on exactitude, in that it cannot definitively say that a) in the future the Trump Administration will take punitive trade actions against companies that launch joint ventures in China, and b) that Tesla will therefore have a huge problem.
It’s clear from recent financial results at Tesla that the company is not in the most stable of financial positions. I have repeatedly pointed out that Tesla’s financial results show that the quarterly loss is matched by quarterly increases in plant and equipment. But if Tesla is making those investments expecting to make some sales into China, or that the pricing is based on certain supply costs that are no longer true because of trade war retaliations, Tesla’s financial position could turn sour very quick.
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