How China first saved and then exploited Elon Musk – The Post

In August 2018 Elon Musk gave an interview to the New York Times about the many problems affecting Tesla, his electric car company, including investigations and complaints related to the safety of its factories and Autopilot driver-assist system, as well as production delays. Confirming how difficult that period was, the New York Times he wrote that during the interview «Musk alternated between laughter and tears» (later it was Musk himself who https://twitter.com/elonmusk/status/1034458577346260992 that «there were no tears»).

In the midst of this crisis, which lasted from mid-2017 to mid-2019, Tesla was very close to bankruptcy: according to Musk it came about “a month” away from bankruptcy before recovering and starting a period of great growth. The company was saved above all thanks to a bet made by Musk, who decided to focus on opening a production plant (called a “gigafactory”) in Shanghai, China, a country that represented an enormous potential market and could offer specialized workers and cheap suppliers.

Musk managed to prevail on the Chinese authorities to obtain rather preferential treatment and a series of incentives for the introduction of Tesla in China. Among all, he convinced the Chinese government to adopt a law similar to the one in force for some time in California, where there is an active program that rewards companies that produce zero-emission vehicles with energy credits. In this way, those who produce polluting cars must purchase credits from the most sustainable companies, in a process that encourages the electric transition and economically supports companies that produce less polluting vehicles. By some estimates, the California credit system has earned Tesla $3.7 billion since 2008. Musk’s goal was to replicate it in the Chinese market.

It was the beginning of an idyllic period for relations between Tesla (and Musk in particular) and China, a relationship which, according to some, however, has deteriorated and has begun to harm the US company just as the Chinese electric car sector has recorded strong growth. Before all this, however, in January 2020 Tesla opened the Shanghai gigafactory, which was built in less than a year and began producing vehicles for the Chinese, European and Oceania markets.

The spread of the pandemic did not stop the plant, which remained closed for just two weeks while the historic Tesla factory in Freemont, California, was forced to comply with more stringent rules. At the time, Musk complained a lot about it on Twitter, where he began to publish increasingly skeptical and controversial content about Covid and the policies necessary to contain it. According to a long article by journalist Ronan Farrow published by New YorkerFurthermore, this phase would be the beginning of the process of political radicalization that has led Musk to support increasingly extreme positions in recent years.

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In August 2020, as a guest on a podcast, Musk judged the difference between the United States and China as follows: «China rocks. The energy in China is excellent. There are some of the smartest and hardest working people there. They are not pretentious and complacent like in the United States.”

For a few years the plan went as Musk hoped: in October 2021, Tesla surpassed one trillion dollars in stock market value thanks to a period of strong growth that made Musk the richest man in the world. As the company expanded into China, however, the local industry began a period of profound – but rapid – transformation, which led to the current success of brands such as BYD, China’s best-known electric vehicle manufacturer. According to a reconstruction of New York TimesHowever, the warm welcome given to Tesla by the Chinese government and the explosion of Chinese electric vehicles would be closely linked.

China has treated Tesla well, guaranteeing it land for the factory at low prices, advantageous loans and mortgages and the aforementioned tax incentives, as well as allowing it to operate without a Chinese industrial partner, something that has never happened before for a foreign automotive company. These favors were part of the Chinese strategy which aimed to generate what in the business world is called the “catfish effect”, from the name of a fish so aggressive that it pushes other fish to swim and move faster when it is inserted in a new environment.

– Read also: Where BYD comes from

In economic terms, this phenomenon describes the increase in internal competition within a country – or a sector – when a completely foreign and combative agent intervenes. This is what would have happened in China, as suggested by the drastic drop in sales recorded by Tesla in the first quarter of 2024 (-19% compared to the previous year) and the growth of local companies such as Xiaomi or the aforementioned BYD, which offer models at lower prices (the latter in particular took the title of largest electric vehicle producer in the world from Tesla at the end of 2023). The situation in the sector has changed quickly and profoundly: in 2011, during an interview, Musk laughed when the journalist indicated BYD as a possible competitor to Tesla. “Have you seen their cars?” Musk replied sarcastically.

Musk wasn’t the only one who had low expectations for BYD. For many years, in fact, the company’s electric cars were “the laughing stock of the industry”, as he said to New York Times Michael Dunne, expert on the Chinese automotive sector. BYD’s growth was made possible precisely by the Chinese government’s tax incentives, which allowed it to occupy 40% of the country’s automotive market (according to some estimates it could control half of it by the end of 2024).

Over the last few years, according to the New York Times, China would build enough auto factories to meet double its domestic demand. This triggered a trade war that forced Tesla to significantly lower the price of its models, reducing earnings. The unexpected growth of BYD and other Chinese companies has pushed the European Union to launch an “anti-dumping” investigation, where dumping means “a practice whereby large companies introduce into the market European Union of products at a much lower price than the market price.” At the beginning of the year, Musk himself commented on the growth of BYD and other Chinese brands, claiming that without a policy of customs tariffs they “will destroy a large part of the world’s companies”.

Tesla’s plant in Shanghai has also generated turnover for the many Chinese companies that collaborate there, the so-called production chain of the automotive industry, which particularly concerns LK Group. The company was especially crucial in the development of “gigacasting”, an innovative method of producing large structural parts of automobiles through aluminum die casting (a technique in which molten metal is injected into a metal mold). In this way, instead of several parts of different sizes held together by welding, rivets and glue, you obtain a single piece. And time and costs are reduced. To achieve this, Tesla had commissioned a “gigapress” from LK Group, the largest die-casting machine in the world, which was enthusiastically presented by Musk himself.

LK Group founder Liu Siong Song told the New York Times that he developed the technology by working with Tesla for about a year. As of 2022, however, his company has sold gigapresses to six other Chinese car manufacturers. Such a shift in production methods made Tesla do to Chinese automakers what Apple did to the local electronics industry, especially the iPhone supply chain, which had contributed to the emergence of many local companies that have then also worked with brands such as Huawei and Xiaomi.

The reconstruction of New York Times the alleged “catfish effect” generated by the Chinese strategy did not convince everyone. Kevin Xu, investor and author of Interconnected, a newsletter dedicated to technology and in particular to relations between China and the United States, underlined how Tesla’s success has damaged companies like BYD for many years. China’s plan – if it was a plan – would therefore have been very risky: «When Tesla’s electric cars began to leave the Shanghai gigafactory (…), BYD’s revenues halved, sales dropped by 20%. % compared to the year before and the company is almost dead,” Xu wrote. BYD was therefore forced to invest in new designs and more resistant and reliable batteries, thus making itself more attractive to the public. In short, the dynamic with which it overtook Tesla would have been different from that theorized by the “catfish” effect, and more linked to a company reaction to the crisis following Tesla’s arrival.

However, Tesla’s entry into the Chinese market has had a notable impact and helped companies even outside the traditional automotive sector supply chain. Among all, those of batteries, a fundamental element for an electric vehicle: in the United States, Tesla has a historic agreement with Panasonic but in China it mostly uses batteries produced by a company that was almost unknown until recently, CATL, which built one plant near Tesla’s and today is the largest battery manufacturer in the world.

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Meanwhile, the situation around Tesla continues to change. This week the company cut about 10% of its workforce (14,000 people worldwide) and two key executives left, but it also announced some news. At the beginning of April Bloomberg wrote that Tesla was preparing to abandon the project of the so-called Model 2, an electric model with a price of 25 thousand dollars, news immediately denied by Musk, who accused Bloomberg to lie.

However, the news about the Model 2 seems to be well founded and has caused quite a stir because it would undermine one of the original promises made by Tesla. In 2006, in fact, the company published on its website a “general plan” for the future, which can be summarized as follows: starting with expensive and elite cars (the Roadster) to finance vehicles increasingly within everyone’s reach, up to producing a “low-cost family car”, the Model 2. Even Martin Eberhard, who founded Tesla in 2003 together with Marc Tarpenning, criticized the decision, calling it a shame and a further opportunity for Chinese companies. Despite the denial to Bloombergthe Model 2 project appears to have been shelved – if not abandoned – because Musk wants to focus on “robotaxis”, vehicles capable of driving themselves which in 2019 he promised would be available “within a year”.

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