Elon’s Deal With The Devil
What do you do if your company has 50% of its production capacity in China, and competition in China along with rising trade tensions between the U.S. and China is really starting to hurt?
If you’re Elon Musk, you hop on a plane for a meeting with the #2 man of China’s communist party and see if you can work something out.
That’s exactly what Musk did over the weekend.
Tesla (NASDAQ: TSLA) shares are up $27 today (16%) because Musk apparently secured a deal to unleash Tesla’s driverless technology in the Chinese market.
It’s standard procedure that any foreign company that wants in on China’s market has to partner with a Chinese company. So Tesla agreed to partner with Baidu (NASDAQ: BIDU) and use its maps and navigation for Tesla’s driverless tech (though it should be noted the two companies already have a relationship).
Of course, that means Tesla’s driverless software will be an open book to Baidu. It seems like a win for China…
China also gets a PR win…
And Tesla had to pass Chinese data security and privacy requirements, which, if you count making a foreign company jump through hoops as a win, well, notch another one for China.
China: 3, Tesla: ?
Now make no mistake: Elon Musk had no choice but to go hat-in-hand for help from China.
For starters, over the last year or so, Tesla has been cutting prices to stay competitive in China. But those price cuts may have wiped out Tesla’s operating profits in the Middle Kingdom.
Plus, the move into China may have been a strategic mistake. Tesla announced the Shanghai factory that now accounts for over half of Tela’s production in 2018. You may recall a tariff war had just broken out between the U.S. and China, a Chinese factory seemed like a pretty good way to get around the tariffs.
But that was before COVID blew up the relationship between the U.S. and China. Tesla is doubling down while other companies are moving out.
If you’re a Tesla shareholder, you have to like the fact that Musk is doing whatever he can to secure (or salvage) Tesla’s position in the Chinese market. It’s exactly what a good CEO should do. I’ll call that half a win for Tesla.
If there’s a solid win to be had, it’s that Tesla may now get the chance to further test and refine its autonomous driving technology. If it can work out the kinks that have kept U.S. regulators skeptical after a string of accidents, that could be a really big win for Tesla.
So we’re up to China: 3, Tesla 1.5 on the scoreboard. Definitely better than where Tesla was a few days ago…
Little Puppy
If you’ve read Pro Trader Today for a while, you know I’ve been concerned about Tesla’s dependence on China for a couple of years — that it’s a pretty obvious target if China wants to step up the tit-for-tat trade game with the U.S.
So while Tesla hasn’t been explicitly targeted, there should be no doubt that China’s subsidized support for its domestic EV companies is aimed at least in part at Tesla. The stock price is a pretty clear indicator of that.
And I have to think that China will never allow Tesla to truly compete with the likes of BYD and other Chinese car makers.
Seems to me China can lead Tesla around like a little puppy, throwing it a bone every once in a while but still keeping it on a leash.
That’s not terrible, could be a lot worse.
What I’m looking forward to is seeing if Musk starts shilling for China here in the U.S. Will he start campaigning against the TikTok ban? Will he continue to support China’s claims on Taiwan?
And if he does increasingly parrot Chinese talking points, will that change SpaceX’s relationship with the U.S. government? Could Starlink come to be seen as a security threat?
Musk did what he had to do to help his company. Today’s rally for the stock is a nice respite. I remain skeptical that it’s a real game changer for Tesla.
Briton Ryle
Chief Investment Strategist
Pro Trader Today
brit.ryle@protradertoday.com
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