Beijing’s ability to attract Tesla Inc. was meant to crown its drive to be at the forefront of the global electric vehicle market. But challenges stemming from the pandemic that has shut down much of the economy raise an ominous sign: The Chinese dream of domination may remain just that.
Given coronavirus-related troubles in the supply chain, Elon Musk’s company says it had to downgrade some parts used in its China-made sedans: It installed a lower-quality and slower chip that enables self-driving from what was originally planned to speed up car deliveries to customers. With owners complaining, Beijing said the company should make sure cars produced in China meet promised standards.
Separately, in early February, Tesla had to shut down its recently opened Gigafactory 3 in Shanghai as part of a wider government order to stop the spread of the virus. Production restarted shortly afterward.
Tesla’s difficulties aren’t unique; the coronavirus has wreaked havoc across industrial supply chains. But they’re the latest blow to China as it tries to corner the entire EV ecosystem, from battery materials to control systems to manufacturing. The last thing the government wants is substandard Model 3s rolling on the streets of Shanghai. And if Tesla is having problems sourcing quality parts, even in normal times, then what of other EV makers that lack the same level of support from Beijing?
In theory, Tesla can get needed components. As of December, it imported more than 70 percent of the parts for cars assembled at the Shanghai facility. The company has said it wants to localize its entire supply chain. Tesla has struck deals with a few larger parts suppliers, like battery maker Contemporary Amperex Technology Co., or CATL; Huada Automotive Technology Corp.; and Shanghai Ligang Joyson Safety Systems Co., a subsidiary of Ningbo Joyson Electronic Corp.
China wasn’t just a big market for Tesla. The country also promised fast production (something Tesla had trouble with in the U.S.) and strong supply chains. Barring the few big companies that Tesla is tying up with, most parts makers are small and medium in size. The outbreak has hit them hardest. Without any visibility on orders from carmakers as the market tanks, their severe cash flow problems will worsen. They won’t be making quality parts any time soon.
Backed by billions of dollars of subsidies and incentives, China seemed to be leading the way in electric vehicles as it grew to become the largest market in the world by sales. Monthly units sold rose from some 6,000 in January 2015 to more than 200,000 in December 2018. Manufacturers of vehicles (Tesla killers) and batteries mushroomed – then wilted away. CATL grew into one of the largest battery makers, yet struggled to keep up on technology and margins.
The decline came last year as China shifted strategy and withdrew some subsidies. In addition, it tried and failed to prevent the broader car market from sinking. For example, green-car-friendly regulations were rolled back in some provinces to boost purchases of conventional autos. Monthly sales of so-called new-energy vehicles fell to 163,000 last December. Electric models as a portion of total car sales fell to 5.8 percent in the first half of 2019, then to 4.3 percent in the second half. In January, the share dropped to 2.8 percent. It’s a very long way from China’s goal of 25 percent for 2025.
To stick to its official target of selling 2 million electric vehicles this year, China will need to spend over 100 billion yuan ($12.7 billion), according to an estimate by Goldman Sachs Group Inc. If Beijing’s green policies start wavering as the rest of the economy teeters, reaching such targets will prove even tougher and could give an edge to places like Europe that have been slower but more consistent on policy.
Still, investors have been hopeful. Before the coronavirus upended things, stock prices of electric car-parts suppliers surged on the Tesla tide as cars started rolling off the Shanghai production line. The reality is that they need a lot more Teslas (and electric cars in general) to be made and sold before they benefit.
EVs now look like they’ll be an even more distant reality in China.