China sees Tesla as the “Apple of the automotive industry.” But the government has given Tesla preferential treatment because it wants something in return: To help its domestic electric vehicle industry one day compete globally.
Last week, Elon Musk danced on stage in Shanghai to celebrate the first Chinese-made Model 3 electric cars to roll off the Shanghai Gigafactory production line.
For Tesla’s embattled CEO, this moment was a long time coming.
As Zhāng Jiǎjiǎ 张假假 wrote on the WeChat platform “World of Boss” (饭统戴老板 fàn tǒng dài lǎobǎn) last November, Tesla’s China adventure was that of a “typical white-guy CEO” whose brashness and overconfidence got him nowhere. But after getting humbled and going through “production hell” back home, he returned to China more willing to compromise.
Chinese government policies of late have also grown more accommodating to Tesla: for instance, by allowing it to wholly own its factory and to benefit from the same subsidies that domestic manufacturers such as Xiaopeng and NIO get. The theory is that by Tesla can help build up the supply chains in China and have the same downstream impact as Apple did in helping spawn the likes of Xiaomi and Huawei.
Yet the Chinese government’s welcoming of Tesla with open arms is a risky move. After having spent billions growing the domestic market and supporting domestic manufacturers, opening the doors to Tesla could be, as Zhang writes, like “putting a catfish in a pond.”
Below, we’ve translated Zhang’s article, which we think provides an interesting look inside China’s electric vehicles (EV) industry.
By Zhang Jiajia on World of Bos, November 16, 2019
Translation by Johanna Friese and Jordan Schneider (condensed and edited)
In early 2008, Tesla CEO Elon Musk welcomed a special guest to his San Francisco headquarters: China’s Minister of Science and Technology, Wàn Gāng 万钢.
That year, the lives of Musk, 36, and Tesla, 5, were hanging by a thread, with only $9 million left in the company’s books and its capital running out. Another of his projects, SpaceX, was also facing financial trouble after three previous launches had failed.
Wan Gang, who had just been elected chairman of the Public Interest Party of China [致公党 Zhìgōng Dǎng, one of China’s eight legally recognized political parties], was visiting San Francisco — Zhigong was founded in San Francisco’s Chinatown [in 1925], just 50 kilometers from Tesla’s headquarters in Palo Alto. Several accompanying friends had told Wan Gang: You have to go visit this company.
In a showroom tent in front of Tesla’s headquarters, Wan Gang took his first test drive of Tesla’s newly-launched two-door electric sports car, the Roadster. In addition to being an official, Wan Gang is also one of the world’s leading automotive experts and a fan of new-energy vehicles.
This was Wan Gang and Musk’s first meeting — it was also the first time Musk shook hands with China. At that moment, little did they know that 10 years later, they would be the two strongest actors on the global alternative energy stage.
Tesla experienced a turning point later that year, when NASA awarded SpaceX a $1.6 billion contract on December 23. The next day, Musk pulled out his remaining $20 million and, with the help of his employees and friends, put together a new round of $40 million in funding by December 24, saving his company.
Once back in China, Wan Gang took charge of the Chinese auto industry and launched a race to catch up on the alternative energy track. To turn his vision into reality, Wan Gang decided to make full use of China’s advantages: its vast consumer market, strong central financial system, and mature industrial production chain.
Eleven years later, in 2019, Musk showed up at the inauguration of his new Gigafactory in Shanghai. Tesla had become the first foreign car company granted permission to build a wholly foreign-owned production plant in China.
Meeting Iron Man
In 2000, Wan Gang, who had worked for Audi for many years, submitted a letter to the Chinese State Council suggesting the development of electric vehicles (EV) as a means of advancing the domestic auto industry.
The history of China’s auto industry has been as unsuccessful as that of the national soccer team. When it comes to the three core components of traditional vehicles — engine, transmission, and chassis — Chinese automakers could never hope to catch up with foreign manufacturers.
In contrast, China had an advantage in the field of electronics manufacturing, which is a prerequisite for the production of the three core components of EVs — batteries, electric motor, and electric controls. Wan Gang believed that concentrating efforts on the development of EVs could put China on a more equal footing with competitors in the global auto market, or even allow it to take the lead.
Wan Gang’s letter was approved by the central government, and so an R&D program on the three core technologies of electric vehicles got underway.
At that time, electric vehicles were still unpopular. In 2003, BYD purchased 77 percent of Qinchuan Automobile, and when it announced a move into the development of EVs, its share price fell for three days in a row.
That same year, GM announced a recall of its 12-year-old all-electric GM EV1. The death of the world’s first electric car, the EV1, from its stunning debut in 1990 to the end of its production, has been blamed on a combination of factors, including substandard technology, lack of profitability, dwindling policy support, and sabotage by the oil lobby.
EVs were first introduced in the United States at the beginning of the 20th century. But for most of the rest of the century, gasoline-powered cars dominated the market — it wasn’t until the oil crisis of the 1970s that EVs were brought back.
Musk, by contrast, has long been a fierce believer in alternative energy. While at Wharton, he even published two papers demonstrating his keen interest in EVs.
In 2008, Musk became chairman and CEO of Tesla. The same year, Wan Gang felt that research on EVs had made a breakthrough and that the time for large-scale promotion had come. He launched a campaign to increase their use in China.
In 2009, the Ministry of Finance and the Ministry of Science and Technology officially issued a document introducing government subsidies, a familiar formula, to stimulate the market for EVs. With the utilization of this mechanism, hopes were high that the Chinese EV industry would make quick headway.
Musk and Tesla’s “second handshake” with China
On the morning of April 21, 2014, Musk’s private jet landed in Beijing.
At the Chinese Ministry of Science and Technology in Haidian District, he met his old friend Wan Gang. After their first meeting in California in 2008, the two had maintained occasional contact.
In 2010, Tesla, a Silicon Valley upstart, raised another $50 million, successfully landed on Nasdaq, and got Toyota to invest and form a partnership. Two years later, Tesla delivered its first Model S, rapidly becoming the darling of Silicon Valley’s rich. Musk himself rose to prominence, taking on the title of “Iron Man.”
Mr. Musk has all the characteristics of a white CEO: self-discipline, energy, ambition, and a strong desire for control. Born into a middle-class family in South Africa, he made his way to North America after graduating high school with only $2,000 in his pocket. After working his way up, he became a billionaire at the age of 31 — yet he still wasn’t satisfied.
Besides his brutal ambition and tenacity, he is also known for his difficult and domineering character. His employees have reported that he frequently curses and yells at colleagues and flies off the handle when he does not get his way.
With this kind of behavior, Musk ran into a brick wall in China. During his 2014 visit, Musk aggressively demanded that China let Tesla set up charging stations, grant it tariffs different from those imposed on traditional cars, and allow it fair competition with domestic carmakers.
Wan did not comply with his demands. The meeting between the two sides ended in vain, the only result being a photo of the two in front of a Chinese landscape painting. Back in the U.S., Mr. Musk complained: “In China, we’re like a crawling baby.”
Wan Gang’s reluctance was due to the severe crisis that China’s EV sector was experiencing just then, involving massive siphoning of government subsidies. The scams included forged sales, false reporting, and arbitrage. From 2013 to 2016, China’s EV industry hit a peak in subsidies granted, but millions were stolen. According to estimates, the total amount of subsidies exceeded $300 billion yuan ($43.6 billion) over the entire period, which almost equals Huawei’s annual revenue from mobile phone sales.
Stil, the most promising way of stimulating industrial development and technological progress in the EV sector was through subsidies. After the initial difficulties, the cleaning and rectification process began. Starting in 2016, fiscal subsidies were reduced and approval thresholds were raised. The new subsidy standards came into effect in 2016, marking the first slight decline in subsidies from the previous year. Musk, on the other hand, was anxious to try to enter the Chinese market. But his first attempt at opening the country’s doors ended in failure.
A dream that burned $1 billion
In the summer of 2016, Musk had a dream.
In his dream, he saw a fully-automated manufacturing plant in which everything was built, transmitted, and assembled by industrial robots, operating at high speed. Soon after, he called a meeting where he announced the construction of this new factory, dubbed the “Alien Dreadnought.”
Fast forward to the spring of 2017, when the multi-billion-dollar automated factories were barely functioning. Faced with huge production pressure, Musk once again set his sights on China with its well-established infrastructure, abundant workforce, and efficient system of government.
On April 16, China’s Ministry of Industry and Information Technology (MIIT) announced that it would relax the investment restrictions on joint venture ownership for foreign automakers in China and raise the current 50 percent ownership limit by 2025.
This new policy sent a signal of goodwill that was different from the past. Just a week after the new policy was announced, Musk was in Beijing, this time shaking hands with Chinese Vice Premier Wāng Yáng 汪洋. As soon as the meeting was over, “Iron Man” could not wait to tweet about his secret trip.
The details of the conversation were not revealed. However, five days later, Musk revealed his plans to build four new Gigafactories. At that time, Tesla still didn’t have a Chinese production site.
Meanwhile, China was working to obtain a firm grasp of the three core power technologies of EVs and give local automakers enough time and space for development. The government was adamant to not follow the failed policy of “learning technology in exchange for market access” that dominated the traditional car era.
In early 2018, Tesla was going through “production hell,” having to repeatedly delay delivery dates and even temporarily suspend production altogether. During this time, Musk slept at the factory for days on end, unable to control his emotions, raging at colleagues, impetuously firing employees, announcing he would take the company private as a joke, and experimenting with marijuana on camera.
The pressure, combined with Musk’s erratic behavior, eventually led to the departure of 36 high-ranking executives in just two years.
Due to continued delivery delays, 20 percent of Model 3 reservation deposits had to be refunded to customers, and lawsuits against the company were filed. Soon the U.S. Department of Justice stepped in to investigate whether Tesla had deliberately misled investors, and famous investor Jim Chanos publicly lamented that Tesla’s stock was worthless.
In the face of these adversities, an irritated Musk took to Twitter on April Fools’ Day in 2018 to post a picture of himself looking shaggy and unconscious next to a Tesla holding a sign that read “Bankwupt.”
Tesla’s quest to overtake traditional car manufacturers and become a world-class car company was on its bumpiest road yet.
China’s EV development can be divided into two stages: During the first stage, top-level industrial design and subsidies created impetus and set the direction; during the second stage, backward production capacity was eliminated and efforts were focused on supporting the development of core technologies.
The three key EV technologies have been carefully protected over the entire process. In October 2015, the MIIT issued a catalogue of conditions for foreign producers of power batteries. If companies did not meet the requirements, they would not be eligible to establish joint ventures in China or receive subsidies.
This essentially excluded foreign power batteries from China’s EV market. This kind of industrial protection was supposed to shield the domestic industry until it was strong enough to hold its own, enabling domestic battery manufacturers to develop at a high speed despite the presence of external powers such as Samsung, LG, and Panasonic.
However, despite having made considerable progress in engine and battery technology, the third core technology, electric control, remained dependent on external suppliers.
Chinese EVs are still working hard to make electrical control a core competency, but both older and newer companies are finding it a big burden. The time they have to get up to speed is decreasing by the day.
Dropping a catfish into a pond
On May 10, 2018, a decade after Musk first shook hands with Wan Gang, Tesla (Shanghai) Co., Ltd. was established. In July, Musk signed an investment agreement confirming the construction of the Tesla Gigafactory in the Lingang port area of Shanghai. Construction officially started on January 7, 2019.
Two days after he broke ground at his new factory in Shanghai, Musk went to visit Beijing, this time shaking hands with Prime Minister Lǐ Kèqiáng 李克强 — the “fourth” handshake with China. During their meeting, the two discussed Tesla’s role in the development of China’s EV industry. Tesla became the first company to benefit from a new policy allowing foreign carmakers to set up wholly-owned subsidiaries in China. The company was not only eligible to receive state subsidies, but also could avoid paying tariffs.
This move by the government was met with mixed responses. William Li (李斌 Lǐ Bīn), founder and CEO of NIO, publicly voiced his complaint regarding the preferential treatment Tesla received. In his view, benefits such as state subsidies should be exclusive to Chinese carmakers. By contrast, Hé Xiǎopéng 何小鹏, founder of XPeng Motors, stated that Tesla’s presence in China would be a positive force for the development of the domestic electric vehicle market.
Behind the Chinese decision to open its doors for Tesla are strategic considerations. Tesla is known as “the Apple of the automotive industry” and has strong similarities with Apple in business model and corporate style. By allowing Tesla into its market, the Chinese government is effectively trying to recreate the effect Apple had on the Chinese tech industry.
Apple not only expanded China’s industrial chain, but also created technology spillover effects that brought Chinese tech companies such as Huawei and Xiaomi to a whole new level, helping them become more competitive. This time around, China is hoping Tesla’s entry will trigger similar reactions and help accelerate the country’s transition to electric vehicles.
At present, Tesla’s core suppliers are still all foreign enterprises. Chinese manufacturers are currently focused on two areas: auto parts and smart electronics, but they have yet to reach the core of Tesla’s industrial chain, both in scale and technology.
In sum, two global players in the field of EVs have begun their final battle: One wanted the other’s vast market, the other wanted industrial spillover. After four handshakes, they finally got together.
Despite some criticism, China’s new-energy policy has been a success — at least in some areas.
At present, parts of China’s industrial chain are sufficiently qualified. Underperforming car manufacturers, however, must face a harsh reality.
On one side, traditional automobile manufacturers represented by General Motors, Volkswagen, and Toyota are developing electric vehicles with a lot of capital resources and R&D capacity. On the other, Tesla’s entry into China is stimulating the entire industry chain and intensifying competition, which will likely give birth to the Huaweis and Xiaomis of the EV industry. Under siege from these two powerful actors, underperforming companies will naturally go out of business.
In the larger context, a strong automobile industry can be considered one of the symbols of a modern industrial power. The rise of the U.S. was accompanied by the rise of General Motors, Ford, and other auto companies. After World War II, the industrial revival of Germany and Japan was accompanied by the development and growth of enterprises such as Volkswagen and Toyota.
The level of a country’s car manufacturing industry is a reflection of its industrial level. After more than half a century of failure in the auto industry, China needs a new generation of proud automakers that can compete with the world.
In March 2018, Wan Gang, 66, stepped down as Minister of Science and Technology. Levi Tillemann, a former advisor to the U.S. Department of Energy and author of The Great Race: The Global Quest For The Car Of The Future, commented: “He is the father of the Chinese electric vehicle industry. Without him, it is unlikely that China would have pushed to overcome the West, that was his great idea.”
Subsidies and policies are in place and talent is readily available. If we cannot catch up, it will not only be the regret of several generations, but also the regret of our country, the world’s first manufacturing power.
Translated by Johanna Friese and Jordan Schneider