Tesla's CEO Elon Musk and retiring CFO Deepak Ahuja plan to immediately deliver its U.S.-made Model 3 sedans to China and to start the operation of its Tesla Shanghai Gigafactory this year while there is a truce on the tariff war between China and the United States.
Musk said that they are not certain about the outcome of the trade negotiations which makes it important to get their cars to China as soon as possible. Musk is hopeful that the negotiations go well but he said that they need to deliver the cars while there's sort of a de facto sort of a truce on the tariff war.
The completion in China's market for energy vehicles is stiff despite the projection of the industry ministry of China that the annual "new energy vehicle" output will rise to 2 million in 2020 and 7 million by 2025. The projection represents 20 percent of the overall autos market in China. Tesla will be facing great competitions from local Chinese companies including Warren-backed BYD, SAIC, and Geely. SAIC are makers of Roewe electric cars while Geely is the parent company of Volvo. Foreign companies like Ford, Hyundai, and Toyota will also add pressure to Tesla's sales since they have also found their way into the nation's manufacturing.
As part of its big plans for China's market, Tesla plans to assure the funds for Shanghai Gigafactory. Ahuja said that the purchased land for the factory is a 50-year lease signed with the Chinese government. He added that the purchase will not fall on the company's capital expenditure but to its operating lease which will show up as the cash flows from operations. The company's investment on equipment, in which they fully own, falls on their capital expenditure. He also said that they will get funding for the majority of that capital spending from local China banks as they have indicated in their letter. He also said that they are expecting very attractive rates based on their dialogue with lots of interest.
According to Musk, hooking up very competitive financing in China really extremely compelling interest rates and so the company expects it to be a capital drain on the company. Musk noted their edge over their automotive companies because of its wholly owned manufacturing company. The company also plans to manufacture batteries for its electric vehicles in China. Musk said that they need to bring the factory in China online to sell low priced model 3 cars.
