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The uncertain future of Tesla in China

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Will Tesla survive in China?

If you’ve followed the news around Tesla lately, you’re more than likely aware of the negative press about the Electric Vehicle manufacturer in China. After reading this blog post, you will understand why this is happening, who is responsible for the operation and also who benefits from these actions. Is there perhaps more than meets the eye?

This blogpost is also available as documentary like video on Youtube

Just recently I started seeing some interesting things going on with Tesla in China. It all started with a woman protesting at the Sjanghai Auto Show earlier on April 19th of this year, which was quickly followed up by one after another negative press release.

The timing of it all just made the situation all the more suspicious, and after reading around a bit I was not disappointed. One of the things I found out, is that the negative press around Tesla in China, seems to be a coordinated effort. Which immediately brings the question of ‘why’ this would be happening? What could the motive behind a coordinated attack on Tesla?

In order to answer these questions, we first need to get an understanding of the Modus Operandi of the CCP, the Chinese Communist Party, and its leader, Xi JinPing. After this, we’ll proceed with a timeline of events that took place over the course of recent months.

The Chinese Communist Party

Before we dive into the future ambitions of China, one should have a basic understanding of how the Chinese political system works. The Chinese Communist Party was established in 1921, and saw the spread of Marxist ideology in China.

Following the Chinese Civil War, leader of the Communist party, Mao Zedong in 1949 proclaimed the founding of the People’s Republic of China, and ruled as a dictator. Furthermore, the CCP, as per the constitution, is the only party that can rule China.

The republic is often referred to as a communist country, but it’s clearly apparent that capitalism has led to its greatest success. The Chinese came up with a newly coined definition of capitalism, being a Socialist Market Economy, while retaining a more communist style of governance.

Goals and IP theft

The world’s third-largest, and fastest growing economy, with a specialty in high productivity factories, has set itself some ambitious goals. One of which, is to become the superpower of the 21st Century. More specifically, in 2009, The New York Times wrote an article titled: ‘China Views To Be World’s Leader in Electric Cars’.

The government’s political support for the adoption of electric vehicles has four goals:

  1. To create a world-leading industry that would produce jobs and exports;
  2. Energy security to reduce its oil dependence, which comes from the Middle East;
  3. To reduce urban air pollution;
  4. And to reduce its carbon emissions

One way of achieving these goals, is by doing what Chinese are good at, and that’s the theft intellectual property. According to a bipartisan Commission on the Theft of American Intellectual Property, which produced a report in 2013, China accounts for at least half – and maybe as much as 80 percent – of US intellectual property theft.

In 2018 a Chinese software engineer working for Tesla, uploaded 300.000 pages of Tesla Autopilot source code to his iCloud, ultimately ending up in the hands of Xpeng Motors in China. The next thing shouldn’t come Now this shouldn’t come as a surprise: According to his LinkedIn profile, the former Tesla software engineer is now employed at XPeng, where he’s in the lead of a department developing autonomous driving technologies.

But this incident, of course didn’t stand on its own. In December 2020 a database was leaked containing millions of registered CCP members, exposing mass infiltration of American companies. But without going into much further detail, by now, one should get a general idea of how the CCP operates, in order to achieve the goals it has set.

State owned media and censorship

Disinformation, censorship and propaganda, incorporated into a tightly closed media ecosystem are an important tool for the Chinese government, to control information flow to its citizens. In February 2016, leader of the CCP, Xi Jinping announced:

“All the work by the party’s media must reflect the party’s will, safeguard the party’s authority, and safeguard the party’s unity.”

The job of Chinese media is to steer public perception in such a way that it serves the greater good. Also worth mentioning, is that Chinese media outlets are all state owned. On top of that, Western media are blocked by the Great Firewall. All in all, the CCP has a vast apparatus to control information flow to its citizens.

Furthermore, undoubtedly its biggest asset, is that it can leverage its immense market size. The CCP will threaten U.S. companies with loss of market and financing, if they deviate from the CCP party line. And by now, you should start to get an idea of where this story is going to.

Fastest way for China to become world leader in production of Electric Cars

As we now know the goals the government has set for itself, what could be the fastest, quickest and most effective way for China, to become world leader in the production of electric cars? Let’s have a look at some of my observations I did while researching this topic.

Tesla in 2018, moved into China after it made a sweet deal with the Chinese government. The factory was approved and built in record time. This was in big contrast with the normal timeframe for companies, to get regulatory approval, local and regional licenses, power and electricity hook-ups, and so on.

As if that weren’t enough, bank loans were offered with unusually low interest rates, Tesla vehicle purchases were made eligible for government EV subsidies, and the Sjanghai free trade zone was expanded to include the Tesla Gigafactory.

Additionally, Tesla’s Gigafactory in Shanghai is 100% owned by Tesla. This is quite remarkable as it is the only foreign manufacturer to have a 100% owned factory in China. In contrast, for any foreign company to enter the Chinese market, it must always form a joint venture with existing Chinese companies.

All in all, Tesla had received just about every favor, and fast-track initiative one could think of, by the time construction of the factory began in December 2018.

After 12 months of dedication, the first Tesla Model 3 vehicles were already rolling off the production line, and since then the facility has grown by leaps and bounds. As a matter of fact, in 2021 production capacity will be scaled up to 450,000 vehicles annually. And if that’s not enough, a piece of land next to the factory is already getting prepared for expansion. Possibly for the production of new, yet to be announced, lower cost vehicle.

China’s car market accounts for roughly 20 million new vehicles sold every year, and after the US, it’s Tesla’s largest market with 120,000 units sold in the year 2020. For comparison, Xpeng is currently producing around 5000 vehicles per month, although production capacity is rapidly increasing.

Now here’s a question: Would it be in the interest of China, to have a non-Chinese company on its market, that is eating away market share, that would otherwise be filled by domestic producers? All, while they (China), intend to become the dominant player on this very same market themselves? This makes absolutely no sense considering the aforementioned goals and ambitions, set out by the Chinese government. Was this an offer too good to be true? And could it be, that Tesla was brought in, with an irresistible offer, to perhaps function as a teacher for Chinese manufacturing?

Tesla China used to gather intelligence

Now, this is where it gets interesting. How could the Chinese get their hands on every piece of knowledge they need, from a company that leads the very same industry, that they want to lead instead?

Giga Sjanghai is employing thousands of Chinese people, allowing them to have an insight look into every detail of how the company is being operated. Think of tooling, production efficiency, suppliers, financials, strategy, software and so much more. Each individual thinking this information will all be tightly locked away behind closed doors is making a fool of himself.

And it doesn’t require too much of a brain, to understand that getting access to this knowledge, is of ut-most importance to achieve the goals set out by the Chinese government. Consider Tesla’s knowledge the fuel that’s going to power the execution of China’s masterplan.

Moreover, by following this strategy, the Chinese in theory could copy the entire lead Tesla has gained over the years, into another company. To be more specific: A Chinese company. It would instantly put them on par with Tesla, while at the same time, leapfrogging traditional vehicle manufacturers in Europe and the United States. Think of it what you want, but Tesla has everything to lose, and China has about everything to win.

As referenced earlier, abroad millions of CCP listed people, are infiltrated in companies, with the sole purpose of stealing trade secrets and advanced technologies. So if this is the modus operandi of the Chinese people outside of China, imagine what this would like, for a US based company located inside of China. Something like kids in a candy store would definitely suit the situation well!

Now, this is where things are starting to become a little precarious; What if the Chinese government decides it has gotten what it wants from Tesla?

If, and I would like to emphasize the ‘if’ here, the following events, are an indication of what’s to come, time could be running out sooner than Tesla had anticipated. Like Cathy Wood mentioned as well, the Chinese were always going favor its local producers, above a foreign one.

So it was just a matter of time for when companies like NIO, Xpeng and Li-Xiang, were operating at a level high enough, to become competitive. Now, with this in mind, let’s have a look at some really intriguing developments going on lately…

Timeline of negative press about Tesla in China

  • October 23rd 2020 – A publication appeared where Tesla was forced to recall 50.000 Model S / X over ‘suspension problems’ in China. Interestingly, failures of the component only happened to be in China. In a statement by the National Highway Traffic Safety Administration, at the time e-mailed to CNBC, it said that: “NHTSA is aware of the Tesla recall due to suspension problems in China. At this time, the agency has not received significant complaints related to these issues in the United States.” Keep in mind that, these US vehicles were the exact same vehicles, as were exported to China at the time, which according to NHTSA had no issues whatsoever.
  • March 19th 2021 – Couple of months later then, a publication by the Chinese government stated that from that moment on, Tesla cars were to be banned from military complexes,  and state owned enterprises, because of possible spying. Of course they were aware of this long before, but until now it wasn’t a problem.
  • April 17th 2021 – A month later. From here on the operation really begins to get up to steam. On April 17th a person tragically died after a Tesla car reportedly lost control and caught fire in Guangzhou. I did a site search for the word ‘Tesla’ on Globaltimes.cn, and noticed that from here on, unusually many Tesla incidents getting reported.
  • April 19th 2021 – Two days later the now all too familiar protest at the Sjanghai Int. Auto Show occurred, where a woman stood on top of a Tesla wearing a shirt with the text: ‘Tesla brake failed me’. Tesla was forced to hand over data, which showed no anomalies. Next, the validity of the data was put into question, and after that it was questioned if Tesla was even allowed to publish ‘private’ vehicle data online without permission of the owner. All of this would lead to the launch of a new Tesla datacenter, together with Chinese partners. How conveniently. First, create a problem, and next come to a solution that transfers even more data, knowledge or technology. All Tesla’s vehicle data in China, could now in theory be used for training Autonomous Driving AI, used in vehicles from competitors. However, keep in mind that I have no proof of this happening, so make of it what you want.
  • April 23rd 2021 – In one occasion, Tesla vehicles were stopped on the highway by officials following the alleged brake failure.
  • April 27th 2021 – A Tesla car crashes into a Chinese wet market injuring 3
  • May 7th 2021 – A Tesla rear-ended a truck at 158km/h, killing the driver. Included in the article from the Chinese media outlet Globaltimes: ‘Brake failure on Tesla cars is not uncommon.’ Well, to my best knowledge, there is no data, nor any research available that supports this claim.
  • May 25th 2021 – A Tesla car loses control and backs in side street shop in Guangxi. The driver claimed: “I wanted to tap the brakes immediately, but the brake pedal would not respond with the car hitting the wall of the shop.” While also mentioning other quality issues on his Model Y. By now, this whole brake story begins to become a little bit pathetic.
  • May 24th 2021 – Tesla vehicles, in addition to military areas and state owned enterprises, are now also banned from government areas. Interestingly, even though other vehicles on sale in China sport similar equipment for active safety purposes, the government specifically targeted the ban on Tesla.

Looking at everything so far, events seems to be very much concentrated over the months of April and May, as well as the fact that topics seem to be related to each other in an unnatural way. Like do all these brake pedals conveniently fail at the same time or what? The thing is, we can debunk these stories here, but remember that the Chinese don’t have access to our media.

After the initial protest at the Sjanghai Auto Show, it seemed that there was a peak in the publication of articles about accidents, all more or less targeting brake problems. And even if there would be a brake problem with Tesla vehicles, incidents would have been far more evenly spread over time.

To me, this whole thing reeks like a coordinated effort, to change public perception and presumably  slowing down sales volumes of Tesla in China. Of course this plays out nicely for domestic vehicle manufacturers like NIO, Xpeng and Li-Xiang. Think of it what you want, I’m not telling you what to think, but even a blind person sees what’s going on here.

How did the Chinese FUD affect Tesla in China?

  • In April 2021, statistics from the China Passenger Car Association showed that Tesla sold 27% less cars in April compared to a month earlier. I’m not sure what to make of these numbers as they could very well have been exported, as happens every once in a while. Of course, media in China were running away with this number in every Tesla article they could write.
  • May 25th 2021 – Tesla announced a new datacenter in China after data related concerns. All data generated by Chinese Tesla vehicles, will now be stored in China.
  • June 1st 2021 – Increased scrutiny from regulators, where have we heard this before, made Tesla open a legal account on China’s Twitter like Weibo. This was done in an effort of debunking false claims and FUD before they are getting out of control. To my best understanding, FUD has always been there for Tesla, so for them taking proactive measures to fight misinformation in China, might indicate they’re seeing it in the numbers. However, this is still guessing at this point, since we have no verified data to confirm this thought.
  • June 4th 2021 – Now another report broke news about much lower orders being placed in the month of May. It’s hard to judge the validity of these news reports since, they are based on ‘people with knowledge of the matter’ and can’t be verified. But if Tesla is seeing a decline in orders, it would still only be visible around the months of July or August, due to their backlog of orders that need to be filled first.

Conclusion

To me, the sweet deal that got Tesla to operate in China, was a mechanism that would enable China to become the next Tesla themselves, in the quickest, cheapest and by far most effective way. The amount of time and R&D the Chinese have saved themselves cannot be expressed in words. If they succeed, in the way I have tried projecting here; China will indeed become the world’s biggest manufacturer of Electric Vehicles.

Now here’s one other thing, that I think would give the Chinese a massive advantage above Tesla. Because they were able to skip the whole process of R&D, and took everything they needed from the candy store in Sjanghai, the total cost per vehicle could be much lower compared to Tesla.

Add to that, that the Chinese basically control the whole supply chain from raw materials, to final product and again, this would provide another advantage in lowering the cost per vehicle. If, and I say IF, the Chinese can get away with this, they’ve executed a brilliant strategy. Their whole game-plan should look something like this:

  • Invite the industry leader with a sweet deal
  • Gain access to everything that puts them in the lead
  • Copy, and incorporate the lessons learned
  • Sell comparable products at a lower price level
  • Give the current market leader a bad name in China and eat its market share
  • Flood world with cheap, advanced, and smart vehicles

If there would be a free market, the Chinese would make European and American manufacturers run for their money. That being said, I strongly believe we will see protectionism and politics step in to protect each market, and keeping the Chinese at bay. At least one thing is certain, and that’s that we’ll be hearing a lot from the Chinese in coming years.

Will Tesla survive in China?

  1. Best case: Nothing happens and all that we’ve seen was just an unfortunate turn of events. Possible, although unlikely, considering the modus operandi of the Chinese.
  2. Likely case: Tesla grows too fast and needs to be slowed down. Keeps access to Chinese market in exchange for transfer of technology and IP, essentially giving away their technological advantage.
  3. Worst case: Tesla will end up doing so much concessions, that it questions whether it should leave China.

So with that we come to an end of this blog post. This blog post is also published as a documentary like video in Youtube. If you’ve found any value in this content, the best way to thank me is by subscribing to my Youtube channel. The video also contains a nice bonus at the end. Really worthwile watching.

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