Welcome to China, Tesla. Now Time to Cough Up: Anjani Trivedi

Welcome to China, Elon. Let’s talk about how this is going to work.

Amid a brewing trade war, Tesla Inc. has emerged as a clear casualty. On Tuesday, Chief Executive Officer Elon Musk sealed an agreement with the Shanghai government to open Tesla’s first factory outside the U.S., with a capacity to build 500,000 cars a year. The investment size wasn’t disclosed, nor were the terms of the arrangement. In a briefing Wednesday, a Shanghai government official said that any sharing of technology with Tesla would be “subject to negotiations,” in response to a question from Bloomberg News.

Access to China is a panacea of sorts for the spirited electric carmaker but Musk is entering with a weakened position. On Tuesday, Tesla also signed an electric vehicle investment agreement with Shanghai’s Lingang Management Committee, the Lingang Area Development Administration and the Lingang Group. A development and innovation center will also be set up. In theory, this is where a technology transfer could happen, even without a joint venture company.

That would defeat the purpose of having a wholly owned enterprise. Then again, that’s Trump’s art of the deal. Why hold Tesla’s feet to the fire when the Chinese government can?

The Shanghai government also suggested it could pony up capital and help Tesla with the construction of its factory to get it running as soon as possible. Estimates for a Model 3 production line range between $3 billion and $5 billion. At its current burn rate, Tesla sure doesn’t have that kind of capital at its immediate disposal. A Tesla spokesperson said construction is expected to start soon, “after we get all the necessary approvals and permits.” It would be around another two years before cars start to roll off the assembly line and then a further two to three years to ramp up to full capacity.

But big promises in China come with a price tag. At the National People’s Congress earlier this year, Premier Li Keqiang reassured the world there would be no mandatory technology transfers in the manufacturing sector. Sharing know-how as a quid pro quo has long been a bone of contention for foreign companies operating under joint ventures, a key way of getting international funds into the country.

In a National Bureau of Economic Research working paper published earlier this year, economists examined data between 1998 and 2007 and concluded that China’s policy of urging technology transfers from “foreign investors to domestic operations” was successful. It found there were multiple ways in which this happened. For example, when the share of a joint venture’s sales rose by 10 percentage points, other companies in the industry were also 10 percent more productive.

For Tesla, which has always extolled the virtues of its own technology, this poses a big threat. Beijing has championed the cause of new energy vehicles and backed the sector with policies and subsidies to make China the largest market for electric cars. Yet it hasn’t produced a champion of its own. Tesla may be the convenient solution.