Tesla Motors (NASDAQ:TSLA) is reportedly in negotiations with Beijing to begin producing its Chinese-market electric vehicles locally, likely through a joint partnership with a Chinese manufacturer. The move could slash the price of Tesla’s high-end EVs by a third, making them dramatically more competitive in the Chinese market, and making it far more likely that Tesla will be able to justify its sky-high valuation and realize Elon Musk’s goal of selling 500,000 cars a year globally by 2020.

 

 

It’s easy to see why Tesla would make an aggressive play for the Chinese market: besides its huge and increasingly affluent consumer-base, China also has a strong central government that’s committed to putting 5 million green vehicles on its roads by 2020. To meet that goal, Beijing is placing a big bet on electric-vehicle technologies, and is in the process of building out a national network of EV charging spots — potentially a massive boon for Tesla, which has hitherto struggled to provide its Chinese customers with a viable charging infrastructure. 

Still, the Middle Kingdom’s embrace of EVs isn’t all good news for Tesla. Besides building out a charging network, China’s government has also been using hefty subsidies and mandated public green-vehicle purchases to buoy the domestic electric-vehicle market, in the hope of creating a new generation of automakers that can compete with the foreign-owned giants that dominate the global conventional-fuel vehicle industry. That’s given a big boost to China’s EV manufacturers, and is making it far harder for Tesla to compete in the region. “Up until recently, China has been an underperforming electric vehicle market, and Tesla has been an over-achieving electric vehicle company. Suddenly, that equation has flipped,” writes EV expert Levi Tillemann.

The chief beneficiary of Beijing’s largess has been BYD (OTCMKTS:BYDDY), which currently makes four out of 10 electric vehicles sold in China. Though the company — in which Warren Buffett took a 10 percent stake in 2008 — initially struggled to bootstrap its EV business, it has now achieved rough parity with Tesla in terms of vehicles sold, and benefits from diversified operations that also include mobile phone batteries, hybrids, and conventional-fuel vehicles, providing the firm with access to growth capital that Tesla currently lacks. Despite this, BYDDY is likely significantly undervalued, writes Bloomberg’s David Fickling. “The stock is now up 44 percent since its low point in the wake of China’s stock-market crash, but in valuation terms it’s still a snip compared with Tesla,” he notes.

Increased public EV purchases is also good news for state-owned automaker BAIC (1958.HK), which currently sells about half of the EVs it produces to the Beijing municipal government for use as taxis and public government vehicles. SAIC (600104:CH), another government-owned automaker, meanwhile, this month announced plans to invest $3.15 billion in EV technology over the next five years, and is aiming to sell 600,000 mass-market EVs and hybrids by 2020. Changan Automobile Group (SHE:000625) has even more ambitious plans, and is planning to invest $2.83 billion with a view to selling 2 million clean-fuel vehicles by 2025.

And while Tesla is looking to fight its way into Eastern markets, China’s homegrown automakers are eyeing the West’s capital, technology and consumers. BYD last year won a major contract to supply EVs to Brussels taxi companies, and also has hundreds of cars on the streets of London, Rotterdam, and even Havana. Both BAIC and SAIC, for their parts, have opened research facilities in Silicon Valley, and are teaming with Western companies, including Siemens and Volkswagen, to improve their EV technologies. Tencent-backed (HKG:0700) NextEV has also put down roots in the Bay Area, installed a former Ford executive as its CEO, and aggressively poached engineering talent from Western automakers, including BMW and Tesla, with a view to building a global EV brand.

Perhaps most troubling for Elon Musk: last year, JAC Motors (SHA:600418) inked a deal to export 2,000 of its electric vehicles for sale in various US markets. That won’t make much of a dent in Tesla’s sales, but it’s a pointed shot across the bows of the US automaker, and a reminder of Beijing’s enduring ambition to turn China into a major exporter of automobiles.

Given all this, it’s easy to see why Elon Musk is eager to gain a manufacturing foothold in China, and to start competing on a more or less equal footing with the country’s domestic EV automakers. Still, it’s likely to be several years before the first Teslas roll off a Chinese production line. That might give the homegrown firms just the head-start they need, writes Rene Chun. “The new Chinese e-cars, with their comic book names and Crazy Eddie prices, might be whisking Foxconn executives through the streets of Shenzhen by then,” he writes. Either way, China’s automakers look determined to give Tesla a run for its money as the domestic and global EV markets heat up.

 

Companies to watch 

*   LeTV, the Chinese answer to Netflix, is teaming with Aston Martin to produce a new electric vehicle, which it plans to unveil in April. The company reportedly has its sights on the Indian EV market, which like China’s is expected to boom in coming years. 

*   CH-Auto Technology Co. this year unveiled what it says will be the first Chinese-made  electric sports car on the market. Using a Tesla-style strategy, CH-Auto aims to build brand recognition with a luxury EV, the release more affordable mainstream models.

*   Chinese startup Youxia Motors directly copied Tesla’s Model S for its $32,000 Ranger X vehicle, due to ship in 2016, which also takes design cues from the talking Pontiac featured in the “Knight Rider” TV show. 

*   Michigan EV battery-maker A123 Systems was bought out of bankruptcy by China’s Wanxiang Group, and is now supplying batteries to Chinese companies such as carmakers Chery and SAIC and bus maker Tianjin Santroll.

 

Ben Whitford is the U.S. correspondent for The Ecologist. He has written for the Guardian, Newsweek, Mother Jones, Slate, and many other publications.