Why Musk and Tesla could face a road to perdition in China

The mega-rich entrepreneur has managed an amazing balancing act between Washington and Beijing

Tesla risks running out of road in China as American-Sino relations stall.

In 2019, Elon Musk opted for a fast lane approach when he opened the electric car giant’s US$5 billion Shanghai Gigafactory. Sales have soared since then.

Latest figures from consultancy LMC Automotive showed that Tesla’s state-of-the-art plant sold up to 150,000 vehicles last year or roughly a third of the group’s overall global sales.

But geopolitical tension between the world’s two largest economies has cast a giant shadow over the company’s Made in China policy by another of Musk’s titans, SpaceX. 

“Other American CEOs have close relationships [with] the [ruling Communist] Party. But he is the only one who loudly praises Beijing while running [SpaceX] with incredibly sensitive and powerful defense applications,” Isaac Stone Fish, of the Asia Society’s Center on US-China Relations, said.

“Can Musk continue to walk this line? A clearer separation between SpaceX and Tesla would help him manage the potential downsides of a spiraling US-China relationship. Musk, and those who invest in his companies, would do well to be wary of these risks,” he wrote in a commentary for Barron’s, which is owned by The Wall Street Journal, in November. 

With a personal fortune of around $190 billion, the world’s richest man has made China a cornerstone of his global strategy. The move has paid off.

Paved with gold

So far, the long and winding Chinese road has literally been paved with gold. Tesla now has a market capitalization hovering around $830 billion. On Wall Street, only Apple, Microsoft, Amazon and Alphabet, the parent of Google, are more valuable.

Yet to do this, Musk has had to cultivate his image with “the Party.”

“China rocks in my opinion. The energy in [the country] is great. There’s a lot of smart, hard-working people. And they’re not complacent, whereas I see in the United States increasingly much more complacency and entitlement,” he told Automotive News Publisher Jason Stein in an interview back in July.

Fast forward six months and Musk is planning to roll out the new Model Y later this year and open a design studio in Shanghai. It will be tailored to Chinese consumer tastes in electric vehicles, the Reuters news agency reported this week.

Already the priority is to hire a “bi-cultural” design director so Tesla can stay a car’s length ahead of the chasing Chinese pack.

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The decision would fit into Musk’s move to grab a slice of the lucrative compact segment of the market with a cutting-edge $25,000 mini version. Up to 25% of sales are generated in this sector of the industry.

But the competition will be fierce. Homegrown EV runarounds such as The Great Wall Black Cat and  Wulling Mini are hugely popular while the NIO E17 will go bumper-to-bumper with Tesla in its traditional market.

Still, the American icon is a global marque brand with 450-hp pulling power on the international stage.

“A compact Tesla car would do well in China, as well as the rest of Asia and Europe,” Yale Zhang, the head of consultancy Automotive Foresight in Shanghai, said.

Yet driving through a potential storm engulfing Beijing and Washington might be more tricky to navigate.

Even though outgoing President Donald Trump reshaped the relationship with the finesse of a blunt instrument to the head and body of China’s tech industry, a Joe Biden White House is unlikely to hit the reset button.

Hong Kong crackdown

Like it or not, doing business in the country comes with the baggage associated with the Communist Party. In the US Congress, attitudes have hardened over human rights violations against the Uighur Muslims in Xinjiang province amid forced labor allegations.

The crackdown on pro-democracy activists in Hong Kong has also brought international condemnation while tension in the South and East China Seas has escalated. 

Another flashpoint has been the decision by Wahington to blacklist Chinese companies with perceived links to President Xi Jinping’s administration.

“It’s been quite a balancing act [with] Tesla and the aerospace manufacturer SpaceX. [They have] managed to play nice with both the US government and the Chinese Communist Party. Musk has one of the closest relationships with Beijing of any American business leader, and at the same time, provides the Pentagon with technology that could help the US military defend the Taiwan Strait,” Stone Fish, of the Asia Society’s Center on US-China Relations, said.

“So far, it’s worked … But investors are overlooking the potential for spiking US-China tensions … The Biden administration will likely continue to challenge China’s predatory trade practices, and will better coordinate its strategy with US allies, further alienating Beijing,” he added.

In other words, Musk has to avoid the road to perdition as he drives Tesla forward in the dragon economy.