China in Tesla's 2018 annual report

On February 19, Tesla released its 2018 Annual Report to the Securities and Exchange Commission (SEC) (Form 10-K, hereinafter referred to as the Tesla Annual Report), describing the company's operations, product planning and potential risks. Information about Tesla's operations in China and its Shanghai plant is also disclosed in the annual report. We combed the Tesla Annual Report, and China-related content, for your reference. Where does the money come from to build a factory in Shanghai? Minority Out-of-pocket + Majority Loan On October 17, 2018, Tesla announced that it had secured an industrial site of 864,885 square meters in the Shanghai Port Equipment Industrial Zone for 973 million yuan. Construction of Tesla's Shanghai plant breaks ground on January 7, 2019. Tesla CEO Scott Musk said the Shanghai plant would require about $2 billion in investment. Where did the money come from? Out-of-pocket? Tesla may not be able to afford to pay out of pocket. Tesla reported a net loss of $976m in 2018. Although the loss decreased by 50.2% year-on-year, it is still difficult to bear the cost of building a factory in Shanghai. Fortunately, Tesla doesn't have to worry too much about money. Musk has said it will seek funding to build its Shanghai plant in China. Tesla's annual report also confirms that the bulk of its investment in the Shanghai plant comes from "local financial lending in China", in addition to "limited direct investment" in the Shanghai plant. The "direct investment" is part of Tesla's $5bn-6bn capital expenditure over the next two fiscal years. Over the next two years, Tesla's annual report says, Zillah plans to spend about $2.5 billion to $3 billion a year on new product planning, continuing to work with partners to produce batteries, infrastructure and expand Superplant 1 (in Nevada), Superplant 2 (in New York) and Superplant Shanghai. According to Caixin, Tesla is seeking bank loans in the form of syndicated loans (syndicated loans, whereby two or more banks, on the basis of the same loan terms and under the same loan agreement, provide local and foreign currency loans or credit facilities to borrowers through correspondent banks at the agreed time and proportion), and a number of domestic banking institutions are actively seeking to win bids. In addition, for projects like Tesla's plant in China, China's various localities compete to offer preferential terms, whether land or policy, there are preferential treatment. Tesla is also regarded by the Chinese side as "a promoter of the steady development of Sino-US relations." For now, money shouldn't be a problem for Tesla to build a factory in Shanghai. Not bad for money. What's the difference? Although the Shanghai plant broke ground in January 2019, Tesla still faces uncertainties, including lack of management clearance, tight supply chains and uncertainty over the pace of installation and commissioning of production equipment, according to the annual report. The term "regulatory licensing" here refers to what is commonly referred to as the qualification for the production of new energy vehicles. To obtain production qualifications, Tesla needs to complete two tasks: First, on January 10, 2019, the Automotive Industry Investment Management Regulations were formally implemented, according to which all automotive investment projects will be shifted from central approval to local filing management, that is, they will be filed locally in Shanghai; Second In order to complete the procedure of "management license" and obtain the qualification of product production and sales, the qualified automobile investment projects must enter the "Announcement of Road Motor Vehicle Manufacturing Enterprises and Products" issued by the Ministry of Industry and Information Technology after they pass the local archival filing. Caixin quoted an official from the Shanghai Municipal Development and Reform Commission as saying that Tesla had completed its government filing on January 10, becoming the first new energy vehicle company in Shanghai to do so. In other words, the next step, as long as access to the Ministry of Industry and Information Technology, "management license" will no longer be Tesla Shanghai plant uncertainties. So how do the other uncertainties in Tesla's annual report manifest themselves? Supply Chain: Seeking to break the tight supply chain of exclusive battery suppliers is a long-standing source of Tesla's undercapacity and one of the uncertainties surrounding the scheduled start-up of the Shanghai plant. Power battery supply is unstable, the impact on Tesla is particularly prominent. Tesla's earnings report says the company needs raw materials such as aluminum, steel, cobalt, lithium, nickel and copper for production. Both market conditions and fluctuations in global demand have an impact on the prices of these raw materials. Only have enough raw material supply channels, to meet the production needs of the company. In terms of battery supply systems, Tesla reported that it currently has only one battery supplier (Panasonic), although there are several battery supply options. Tesla, for its part, is stepping up its efforts to bring other eligible battery companies into the supplier system. In November 2018, Musk tweeted that battery production at Tesla's Shanghai plant would take place locally, The business is likely to come from several companies, including Panasonic. Soon there were rumours that Lishen had signed an agreement with Tesla to supply batteries to its factory in Shanghai. It was later denied by Tesla. In terms of installed capacity, besides Lishen, the major manufacturers of cylindrical batteries in China also include Bike, Guoxuan High-Tech, Far East Foster, Zhihang New Energy and so on. Add to that the era of Ningde, the leader in power batteries, and which Chinese company still has a chance of becoming a battery supplier to Tesla's Shanghai plant? The answer may not be announced too soon. One reason is that Tesla's Shanghai plant may not be involved in battery production in 2019. What does the Shanghai factory make? Begin with "partial trim" According to previous media reports, the Shanghai plant of Tesla will start small-scale production in the second half of 2019. Tesla's shanghai plant, even on a small scale, is set to go into operation in less than 12 months from january 7, when the ground was broken. We take the construction speed of the new car manufacturer Baton Automobile as a reference. In January 2017, Baton announced the construction of a plant in the Nanjing Economic and Technological Development Zone, with plans to complete plant construction and equipment installation by June 2019, after which the plant will undergo four trials. By October 2019, the first phase of the Byten plant is expected to produce 100,000 vehicles a year. Schedule of construction time of Baton Nanjing Factory That is to say, the construction of Baton Factory will take 29 months. Many in the industry believe that even if the policy to build a Tesla plant all the way to the green light, to achieve production in 2019, is not scientific. But when we read the Tesla results, The shanghai plant of zira will not start production in 2019 as an entire vehicle, but rather as part of the model 3's "certain trims" (certain trims). That said, Tesla is not on track to fully localise production in China by 2019. Until then, Tesla's revenue in China was still supported by imported models. But the recent import and export situation is very unfavourable to Tesla. Sales in China Falling, Tariff Impact Currently, China is Tesla's largest market outside the United States. In 2018, Tesla posted global revenue of $21.46 billion, according to the company's annual report. Revenue from the U.S. Market was $14.871 billion, up 139% year-on-year. Revenue from China was second at $1.757bn, down 15.4 per cent from a year earlier. Business in China accounted for 17 per cent of Tesla's global revenue in 2017, down to 8 per cent in 2018. Tesla's sales in China fell in 2018, according to revenue figures from different Tesla countries, heavily affected by tariff increases in both the US and China since last year. In June 2018, in response to the imposition of a 25% tariff on some US imports from China, the Ministry of Commerce of the People's Republic of China issued the "Announcement on Imposing Tariffs on Some US-Originated Commodities", deciding to impose tariffs on imports of US-originated commodities such as automobiles at a rate of 25% on a reciprocal basis. After the announcement went into effect on July 6, the actual tariff on imported cars in the United States was increased to 40%, and Tesla was among the companies that imposed tariffs. Tesla's annual report points out that, as a result, the U.S. Prices for Tesla Model S and Model X exports to China have risen, and the cost of parts from China has risen as the U.S. Has imposed tariffs on them in advance. Tesla's sales in China have been negatively affected by two factors. Only by building factories in China will it be possible to ease export pressures from tariffs, partly to avoid disruptions to domestic production in the US and damage to Tesla's competitiveness. If tariffs between the US and China are not effectively addressed, "consumers may delay purchasing Tesla or choose other brands with lower or no tariffs," the annual report said.