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Tesla wants Chinese partners to fund Shanghai factory

Tesla wants Chinese partners to fund Shanghai factory

Electric car maker Tesla is planning to raise funds from local Chinese partners to build its $5bn plant near Shanghai, according to reports.

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By Jackson Lewis 02.08.2018

Electric car maker Tesla is planning to raise funds from local Chinese partners to build its $5bn plant near Shanghai, according to reports. The new site would be the company’s first outside of the US and would increase its manufacturing capabilities twofold.

Tesla confirmed the plans for a new factory in China last month after coming to an agreement with the local government in Shanghai, but details about the exact costs or who would be funding the project were not divulged. A new report has now shed more light on the situation, and it appears that Tesla wants local partners to share at least some of the financial burden.

The preliminary deal occurred in early July, but a lot has changed since then. US President Donald Trump rolled out the first wave of auto tariffs days later, and the trade standoff between the US and China shows little sign of resolution. This means that time is of the essence for Tesla as it looks to get its Shanghai plans off the ground.

Tesla is yet to make a profit, and analysts believe that the company will need to raise capital to support its ambitious expansion into Europe and Asia. The car manufacturer has refuted suggestions that it needs help, but it had only $2.7bn in cash reserves following the first quarter and has since been investing heavily in the production of the Model 3 sedan.

A Bloomberg report cited an anonymous source who said that Tesla is looking for outside help in the form of investment. The report said: “The electric-car pioneer is considering raising some of the $5bn it intends to invest in the plant near Shanghai from local partners, according to a person familiar with the plans, who asked not to be identified as the matter is private.”

Tesla has not responded to the news, but CFRA Analyst Efraim Levy expects the fundraising initiative to be true to a certain extent. He added: “We expect some funding to be from China investors but expect international (including the US) funding to be needed too.”

Expanding into China makes sense for Tesla, as the country is the largest market for electric vehicles. The demand for these cars is set to accelerate significantly during the next 15 years due to the Chinese government introducing new regulations to phase out non-electric vehicles entirely by 2030.

If the speculation that Tesla is burning through cash quickly and finding it challenging to turn a profit is true, then China is sure to be a primary market for making changes. The country was responsible for 17% of Tesla’s total revenue in 2017. Any plans will also have taken on greater importance following the arrival of auto tariffs, as China now imposes a 25% levy on cars made in the US.

“In the long run, China will be the most important car market for Tesla by far where the company will earn more than a third of its money,” NordLB Analyst Frank Schwope added. “A plant in China is the best way to avoid high tariffs. It’s a kind of natural hedging.”

Analysts have questioned whether a Shanghai factory will be viable at all for Tesla due to the challenges associated with raising such a significant amount of capital and staffing a large plant overseas. Chief Executive Officer Elon Musk said that new shares or bonds will not need selling in 2018 and claims that internal funding will be enough for the foreseeable future as it ramps up the Model 3’s production.

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