Lately I have been getting a lot more comments on the risks associated with Tesla in China,
I mean it's obviously no surprise and we can all realize why. But I would like to explain
to you how I view China for Tesla, it might not be the business you think.
I have said before, that I kind of separate
the Chinese operations somewhat, from the rest of the business, because it does have
a different business model. It is just a great cash cow generator, and serves a great base
to carry Tesla through more difficult times. What with a diversified cathode approach and
multiple manufacturing locations.
Tesla managed to own the Chinese factory themselves
with no local Chinese company as a joint venture. This was the first time the CCP had allowed
this, but was a strong caveat for Elon in the deal. China also realizes how much they
will benefit from the kind of human capital and innovation having a company like Tesla
in China will create. But Elon is no fool. He's not going in with
his eyes closed. I don't think Tesla even had to invest any money into the initial development.
I think China lent them all the capital required. Tesla just had to spend time setting it all
up. However, there is also lots of great, hard working, talented manufacturing labor
in China. So much so even Tesla can learn from, and improve their next factory through
more experience and knowledge.
I think Tesla repaid the loan fairly quickly, likely with proceeds from the Shanghai car
sales. Therefore Tesla China has already paid for itself, and is now just acting as a great
cash flow generator, further supplemented by Fremont too. These two factories serve
as an excellent base in order to help Tesla to grow to as big as needed.
But Tesla are battery constrained, so why
set up in China, selling lower cost vehicles, when there is still so much demand in the
US for people wanting to spend over $60,000 on a Model Y? Yes, opportunity cost. But the
thing is, in this instance, there isn't really an opportunity cost. This is a win/win partnership
between China and Tesla, or more so CATL and Tesla.
CATL is the world's largest battery manufacturer. China is likely proud of that fact, and want
to maintain and build on that position. However, CATL's cells are not overly energy dense,
and thus reduce range. But it would seem the Chinese market is more accepting of lower
range vehicles, they also spend less on average on vehicles. Therefore Tesla sell a lower
range Model Y to this market, that is not sold in the US or Europe.
But Tesla have these LFP batteries that they need to judge the best, most profitable solution
for. Which it would appear, would be a rear wheel drive standard range model y. These
cells are also manufactured in the Model 3 RWD in the US. Due to the Model 3 being lighter
than the Y, it was able to generate an acceptable range for the overseas market, but also sold
at a higher price tag in that market, compared to China, so the margin will be higher.
It also meant that this would free up more 2170 cells for other vehicles, as they are
no longer being used in the standard model 3.
Alright, it all sounds good so far, but China
has been known to nationalize companies, and steal all their intellectual property.
In fact they just nationalized the auto performance
company Saleen. Stealing all their patents and intellectual property to the estimated
tune of $800 million. Not only that, I believe the director of corporate affairs of the company
has been missing since June.
But if they nationalized Tesla, which in theory shouldn't happen due to Tesla owning their
operations outright, then I am guessing that none of the Tesla's produced there could be
made to work without Tesla saying so, that would be if they could get the lines operational
in the first place. Therefore no point in nationalizing Tesla. That is just a guess,
but I am guessing that Elon is always several moves ahead. Therefore that factory is of
most value to China, when Tesla can control their own factory.
In fact it goes further though, as CATL may be the worlds largest battery manufacturer,
and growing, well that was dependent on one thing, or one company, Tesla. If Tesla lost
its presence in China, then CATL would be producing far too many LFP cells, far more
than any EV OEM could handle. Sure they could go into energy storage, but I don't think
there are many other companies as equipped as Tesla to take on hundreds of gigawatt hours
of batteries. Therefore China needs Tesla.
China does also want to expand their local
EV market too, and with CATL expanding it will mean there are more cells available to
the local OEMs, along with further advances in battery efficiencies, and reduced costs
through economies of scale.
So China can use Tesla to improve their economies of scale with EVs and battery cells, along
with all other benefits a company like Tesla will provide for China.
Tesla is like a machine that turns CATL cells into a finished product. And Tesla take a
huge margin for doing so. How long this relationship will last is anyones guess, but future expansion
there is low cost and fast, with a very high return on capital. But obviously people are
feeling less confident about Chinese operations.
Anyway, for all these reasons, I absolutely
think there is no possible way that Tesla will ever manufacturer the 4680 cell there.
It might just be too much intellectual property worth risking. Those cells are worth tens
of trillions of dollars. Tesla's most important product isn't the Model Y or Robotaxi, it's
the 4680 cell. The fact that Tesla hardly even sells vehicles with their own cell, is
just a further illustration of how early on we still are. It would be kind of like if
Henry Ford outsourced someone to make his engine for the Model T. That's the stage we
are at, not that Ford ever did that, because he knew how important the engine was. But
it's the same for EVs, the battery is the equivalent of importance, and where the most
R & D must be concentrated in order to improve efficiencies for EVs.
However, that's not to say that Tesla may
want to use some of CATL's intellectual property. CATL are currently constructing a brand new
fab, pretty much next door to Tesla's Shanghai factory. This is likely going to be another
cell factory, but it also sounds like it might be some sort of research facility too. My
theory being that perhaps Tesla and CATL will partner together in order to make the idea
LFP cell. The outcome might be that CATL have the rights
to produce the cell in China, and Tesla the rest of the world. Possibly, although I would
also hope that Tesla have some pretty incredible LFP cells in their labs already, and are getting
close to the ideal form factor. I can't wait for Elon to announce another Battery Day where
he presents Tesla's LFP cells. 4680 cells were the necessary cells to take Tesla to
the multi-trillion dollar valuation. These LFP cells will take it to the 10s of trillions.
In fact I am hoping to see some revolutionary new LFP cells from the Korean and Japanese
battery manufacturers too. I am surprised how little we are hearing about LFP cells
from outside of China to be honest. Perhaps legacy have gone all in on nickel cells, and
aren't interested in LFP due to the lower range, and their customers require more range.
I actually have a theory, that when families start adopting to EVs that they will have
a long range EV and an LFP EV. LFP cars still have enough range for perhaps a whole weeks
driving. It's not even like you have to keep the constantly charged. In fact with the building
infrastructure and decreasing charging times, range really is becoming less of an issue.
Likely why Tesla are only offering 280 miles range on their new 4680 Model Y. Because the
extra range really won't be necessary in just a couple of years time.
But if each family had an LFP vehicle, for regular day to day driving, and also a long
range EV for when road trips are necessary, then that should be the best of both worlds.
It is also in fact exactly what I have. My wife has an LFP Model 3, and I have the Performance.
Alright, setting up businesses in nations
with communist regimes is obviously not without risks. Elon and Tesla seem to have a good
partnership with China though. Tesla will likely be too hard for China to run if nationalized,
and the intellectual properties may not be so easy to take. CATL is also dependent on
Tesla consuming everything they can make in order to grow. This is Elon doing a deal,
we would hope that he has considered every conceivable angle already and has many contingencies
for any issues.
Right now China is a great cash cow, and a large part of Tesla's earnings. But as the
new factories grow then China will become less important to Tesla. Elon said that China
will only be about 25% of the market, not the make or break, but still a good chunk
of customers. Of course like always, any business model or or forecast on auto sales is totally
moot if you factor in Robotaxis. So even if Tesla lost 25% of their car sales market,
well it may only look like a couple of percent when compare to Robotaxi income.