Dive Brief:
- Tesla is currently in talks to build an assembly plant in Shanghai, as China's demand for electric vehicles (EVs) increases.
- Tesla's revenue from Chinese sales tripled to $1 billion last year, according to Bloomberg. Setting up shop in China will allow Tesla to drive down operating costs and increase its profit margin.
- Tesla currently owns and operates only one vehicle assembly plant in Fremont, California. The fact that the company seeks an overseas home for its second plant suggests that CEO Elon Musk thinks China is an equally if not more profitable market for Tesla vehicles.
Dive Insight:
Despite the Trump administration's push to create more American jobs and the "Buy American" maxim pervading American politics, American companies will make the best choices to grow their businesses, even if that means offshoring operations overseas. China charges a 25% tax to import Tesla's Model S and Model X, so Tesla will avoid the tax, increase its profit margin and decrease production lead times by assembling vehicles in China.
While a Shanghai plant may not necessarily lower costs for American consumers, it will certainly lower costs for Chinese consumers and spur growth for Tesla. According to the Electric Vehicle World Sales Database, China is the largest market for EVs, with 351,000 delivered in 2016 Q4. China's pollution problem is still severe and widespread, so it makes sense for Tesla's to capitalize on China's desire to incorporate energy-efficient technology.
Building a plant in China will also streamline Tesla's supply chain — indicative of a larger trend to deliver finished products to consumers as quickly and cheaply as possible. Because Tesla does not sell its vehicles via dealerships like other automakers, it's already ahead of the curve. Building plants close to its biggest markets is just the next step.
