The car maker’s shareholders now face the added risk that its global operations could be held hostage to the messy politics of the social-media platform.
By guest author Stephen Wilmot from the Wall Street Journal.
Nov. 7, 2022
Tesla decrease; red down pointing triangle already had a treacherous line to walk between China and the U.S. Chief Executive Elon Musk has made it worse by buying Twitter.
The electric-vehicle pioneer is hugely reliant on China. The world’s largest EV market accounted for about 24% of Tesla’s revenues in the first three-quarters of this year, but the company’s bigger dependence is in production. The Shanghai plant is its largest manufacturing and export hub, with room to make more than 750,000 Model 3s or Model Ys—roughly two-fifths of its global capacity. Not coincidentally, the rise of this factory has mirrored the increase in Tesla’s margins over the past couple of years. The company also needs China’s battery materials: It gets lithium compounds from Chinese suppliers Ganfeng and Yahua, for example.
The relationship has long made Tesla among the global companies most vulnerable to rising geopolitical tensions between the U.S. and China. Although German peers such as BMW and Volkswagen also make a disproportionate share of profits in the country—perhaps as much as 50%—Tesla is unique in fully owning its Chinese operation. This arrangement gives it an incentive to use its Shanghai base for exports on a scale none of its peers do.
Tesla is working hard to diversify its global footprint by building up production capacity in Germany and Texas and alternative sources of lithium supplies, including in North America. But its growth is such that it won’t be able to function without substantial inputs from China for the foreseeable future—a problem it shares with the wider EV industry.
Tesla’s dependence on the country is in a league perhaps only with Apple, whose market value Mr. Musk likes to compare with Tesla’s. Apple CEO Tim Cook generally avoids politics, though. The same goes for the German car makers, which scrupulously avoid taking political positions beyond a general support of “global trade.” VW regularly bats away questions, including from within its own supervisory board, about the appropriateness of having a factory in Xinjiang, where human-rights groups have raised concerns about labor abuses.
Mr. Musk himself has used political statements to curry favor with Beijing, most recently by implying that Taiwan should be part of China. This game will likely get a lot harder now that he is also running Twitter. For example, if he continues with the social media platform’s efforts to close down Chinese networks that tweet about U.S. elections, he might find himself less welcome with Chinese authorities. If he doesn’t, Washington will plainly object.
One concrete example of the risk came in the form of a tweet from Hu Xijin, a prominent former newspaper editor whose Twitter handle is labeled “China state-affiliated media,” with a link to a page explaining why the social-media platform believes “people benefit from additional context when interacting with Chinese government and state-affiliated accounts.” Mr. Hu said he hoped the label would be removed now that Mr. Musk was running Twitter. How the new CEO responds to such requests will be a minefield.
Tesla has been a rare bright spot among Western brands in China this year, with its local revenues up about 50%. Others are struggling: The share of global brands in Chinese vehicle production has fallen to 47%, from 54% in 2019, according to forecasting firm LMC Automotive. The Stellantis joint venture that made the Jeep brand in China is filing for bankruptcy. Some see the visible hand of the Chinese government behind this trend and the parallel rise of companies such as BYD, now one of the world’s most valuable auto makers.
To be sure, there are valid reasons why Tesla is outperforming its peers in China, starting with its exclusive focus on the fast-growing EV category, where many Western brands are weaker than Chinese ones. But Mr. Musk’s amicable relations with the Chinese Communist Party, which has a history of steering consumer tastes, can’t hurt. A big question now for Tesla investors is how adroitly he can maintain them while also pursuing his goal of improving “free speech” at Twitter—a social-media platform blocked for most users in China precisely because that is what it offers.