Tesla Progress in China Is Very Real! (An On the Ground Report)

After yesterday’s earnings report from Tesla, a lot of you may be wondering how exactly it is possible for a publicly traded tech company to suddenly be profitable. EBITDA came in at almost $1 billion, about 30% higher than expectations. So today I went and did the scuttlebutt for all you curious folk out there who may be thinking, “There’s no way Elon Musk got the GigaFactory 3 built in under a year.”

Well, folks, you better believe it. I was there today.

T. I. C. This is China. Usually that acronym is used in a derogatory way, but in this case I think it is happily used in a good way. Because this kind of high-speed development just doesn't happen anywhere else. An automotive executive WeChatted at me today and said, "This is China. In the USA you'd be stuck with a feasibility study at least for a year."

And all I could do was think to myself, "Yeah, probably 3 years."

Instead, we have a situation where Elon Musk worked the BD as hard as he possibly could, the details of which you can read here in a really fantastic article from 1 Red Drop.

For $140 million, Tesla Shanghai acquired a 213-acre (864,885 square meter) plot of land in the new Lingang free trade zone on October 17, 2018. At that time, the land looked like this:

The selfie I took today is basically from at the mouth of this road. From zero to full-fledged factory with a Model 3 assembly line in less than a year. On the earnings conference call, Tesla said it took 10 months. That kind of construction speed can only happen in China when you have the money, the permits, and the backing from the right people. When you know the right people and do things the right China-style way, things can get done lickety-split. And oh did Elon Musk get to know the right people last year on his whirlwind China lobbying tour.

As you can read in the 1 Red Drop article, not only did he arrange for the construction of the factory, he also had to get Chinese laws themselves changed prior to even doing that! Let me explain the Chinese bits of this tweet.

First, the characters there say Zhongnanhai and you probably are asking, "So, what is that?" Well, Zhongnanhai is variously referred to as "China's White House" or "China's Kremlin." Having a bunch of foreigners standing that close to in front of it is, well, very weird. I've literally never seen a corporate guy standing there in 8 years of living here.

Second, you're probably wondering "Who is Vice President Wang?" That would be Wang Qishan, Xi Jinping's most trusted ally. Wang is a guy that Xi likes so much that he brought him out of retirement in 2018 and installed him as the most prominent figure in his Cabinet. It is often said that "only Wang Qishan understood what Xi was trying to do." That's why many Chinese refer to him as "Xi's right hand." Here he is literally embodying that moniker.

So Musk's tour last year should pretty much go down as the lobbying effort of the century.

First, Tesla Shanghai is 100% owned by Tesla Motors. That's unprecedented. Every other American car manufacturer that does business in China, like Shanghai GM, has had to enter into a 50/50 joint venture agreement with a Chinese partner. Not Tesla.

Second, Musk may have nominally "paid" $140 million for the land and pledged to spend $2 billion over the years at the factory. But all of that investment is financed by local China debt from state-owned banks. Not one penny came over from American operations. He's going to be able to pay that debt back with the profits he makes from selling Model 3's and Model Y's direct to Chinese consumers at super competitive prices (if that's what he needs to do, but Tesla's powerful brand equity in China may mean he doesn't have to) that won't carry a value added tax (VAT) because they are produced locally. Customers also won't have to pay a license plate fee, which has averaged approximately 86,000 yuan (~$12,000) the past few years, because that fee doesn't have to be paid on electric vehicles.

Third, the cost to construct this plant came in 65% cheaper than the Model 3 assembly line built in America. And Tesla isn't even lowering prices that much in China on Chinese-made Teslas despite all this margin ballast. They don't even have to share these profits with a JV partner!

This is pretty much a coup for Tesla.

Sure, there is still a whole wing being constructed at the rear of the site where batteries will soon start production.

But there’s a functioning Model 3 assembly line right in there from which Chinese consumers will soon be able to buy up to 1,000 locally made Tesla 3’s per week.

Sometimes living in China can be a real pain. Cultural differences and misunderstandings can get really frustrating. But then I see something like this happen and there's only one word I have to describe the entrepreneurial fervor of Shanghai and China as a whole.

Incredible.