The approval of China to develop 70 hectares (172 acres) of former farmland that is currently overrun with wildflowers is crucial to Tesla’s ambitious aim to increase auto production in Shanghai, its most valued facility internationally.

Tesla may now be a victim of its own success in the largest auto market in the world, which puts into question plans to exploit its cost advantage from Chinese production to drive exports. Tesla was formerly courted by Beijing to help encourage the development of a local electric vehicle (EV) industry.

According to executives at rival companies and analysts, China’s state planner, the National Development and Reform Commission (NDRC), has been cautious about approving new electric vehicle (EV) production plans by all automakers due to worries about overcapacity and a deepening price war started by Tesla.

According to Bill Russo, the founder and CEO of the Shanghai-based advising business Automobility, China has a surplus capacity for producing automobiles of nearly 10 million units annually, or roughly two-thirds of all North American output in 2022.

“You could argue that as Tesla, I’ve got new products, I need to have a new factory to build them in,” he said. “But viewed from the China government’s point of view, all they see is a market that’s oversupplied.”

In a heartfelt May 2022 letter thanking the local government for its assistance during the Shanghai shutdown over COVID-19, Tesla provided specific plans to increase the yearly production capacity by 450,000 vehicles at the new Shanghai location, which would be located about 3 kilometres (1.9 miles) from its current plant. The annual production would be worth more than $18 billion based on retail prices.

According to a person with firsthand knowledge of the situation, Elon Musk, the CEO of Tesla, brought up the expansion during his brief trip to China at the end of last month, even though neither he nor Chinese officials made any public announcements about it.

The individual, who was not authorised to speak publicly, said that after talks with senior Chinese officials, including Vice Premier Ding Xuexiang, Musk informed a small number of Tesla employees that he saw “positive progress” in negotiations regarding the expansion without going into further detail.

Requests for response from both Tesla and the NDRC went unanswered.

“Tesla is doubling down on China, and while it’s hit some snags over the last year we believe Musk’s trip to China has soothed the situation over and we expect progress announcements over the coming months,” said Dan Ives, an analyst at Wedbush Securities.

After breaking ground in 2019, Tesla’s Shanghai facility took less than a year to finish construction.

Tesla’s reliance on China complicates matters in the US because incentives under the Biden administration encourage automakers to produce batteries and vehicles domestically.

However, Tesla’s Shanghai facility, which last year produced almost 711,000 Model 3 and Model Y vehicles and increased annual maximum capacity to more than 1 million, has been essential to its cost advantage over its competitors and fueled exports to Southeast Asia and Canada.

Tesla has been in talks with India about possible manufacturing investments and has been courted by governments including South Korea and Indonesia, with a target of selling 20 million cars globally by 2030, up from 1.31 million in 2022.

However, rival Nio has claimed that production in China offers a cost advantage of up to 20% over EVs built overseas, citing the nation’s control over the supply chain and raw materials.

Aiming to enter the market, Chinese consumer electronics manufacturer Xiaomi has been making slow progress in obtaining a production licence as government worries about oversupply grow and Tesla pushes for its Shanghai expansion.

However, Lucid Group, a U.S. premium EV manufacturer, has been told that the likelihood of it happening is slim, according to industry sources.

Attempts to reach Xiaomi and Lucid for comment were unsuccessful.

Tesla’s wait for approvals contrasts with the enthusiastic reception it received when it first signed the agreement to launch its Shanghai factory five years ago.

Analysts at the time hypothesised that China was utilising Tesla to support local EV development since its power would compel smaller competitors to adapt quickly in order to survive.

“The script has definitely flipped,” said Automobility’s Russo. “China needed Tesla to open the market for retail consumers, but Tesla needs China, because the supply chain benefits of being here and the competitive bar that’s set here makes Tesla a more competitive company globally. And that’s the missed opportunity if they don’t get that unit of capacity.”

(Adapted from Reuters.com)

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