Tesla Inc. and the Shanghai government have left out a crucial detail in announcing a groundbreaking deal for the biggest name in electric cars to build vehicles in China: how much it’s all going to cost.
Tesla CEO Elon Musk sealed a crucial agreement Tuesday to start building its second vehicle assembly plant in the world. Construction will begin soon after approvals and permits are secured, and the first vehicles will roll off the line within roughly two years, a Tesla spokesman said in an email. It’ll take another two to three years for the factory to reach its capacity to build about 500,000 vehicles annually.
The preliminary agreement is a major development in Tesla’s more than yearlong effort to open China’s first production facility that will be wholly owned by a foreign carmaker. But the absence of detail about the size of the investment is turning heads because the Musk-led company had just $2.7 billion in cash at the end of the first quarter. Tesla has been burning through billions of dollars as it’s struggled to ramp up manufacturing of the Model 3 sedan.
“The biggest question right now for investors -- bulls and bears alike -- is how are they going to pay for it,” Ben Kallo, a Robert W. Baird & Co. analyst with the equivalent of a buy rating on Tesla shares, said in a Bloomberg Television interview. “They will have to get capital.”
The quest to construct its third so-called gigafactory gained urgency as Donald Trump has engaged in a trade war that’s ensnared imports of Tesla’s vehicles into China. The company boosted prices of Model S sedans and Model X crossovers in China by as much as $30,000 after Beijing imposed additional duties on American-built autos, putting its vehicles beyond the reach of even more consumers in its No. 2 market globally.
Tesla follows Harley-Davidson Inc. in charting plans to expand outside the U.S. to circumvent tariffs under Trump’s escalating trade disputes. While the motorcycle maker’s shares have slumped amid attacks by the president, Musk’s plans have so far avoided controversy. The company’s stock rose as much as 2.9 percent Tuesday in New York trading.
Tesla is both looking to expand its capacity and to more efficiently reach global markets. Musk, 47, said more than two years ago that he expected Tesla to produce more than 500,000 vehicles in 2018 at its lone car-assembly plant in Fremont, California, but the company is well off that pace because of the Model 3’s slow start. It’s built a total of about 88,000 vehicles through the first half of this year.
The company also has a giant battery factory in Nevada. After moving ahead in China -- the world’s largest market for electric vehicles -- Musk has said he will reveal plans toward the end of this year to build a plant in Europe.
A year ago, Tesla said it was working with the Shanghai government to explore local manufacturing. In addition to avoiding China’s import duties on U.S.-made cars, a plant in China also will reduce shipping costs and potentially make sourcing components more economical.
“You’ll see something similar to what they did in Nevada, with a partner like Panasonic,” said Kallo, referring to the gigafactory that Tesla and its Japanese battery-cell supplier operate along near Reno. “I’m not saying that Panasonic will be the partner, but you’ll see someone step in there, and I think those details will be announced in the next one, two, three months.”