China is one of the most influential consumer, industrial, and raw materials markets in the world. Unfortunately, they are also a source of harmful environmental practices and human rights violations.
Companies who want to do business in China are often required to share their IP in order to gain access to the market, while having to prove that their supply chains do not violate overseas regulations. It makes for a very complicated set of decisions and public relations maneuvers.
That’s the backdrop for a very odd series of circumstances around the 2023 China Automobile Forum in early July.
Tesla was one of 16 car makers – the only non-Chinese manufacturer – to sign a four point pledge that included an agreement to adhere to “core socialist values.”
Doing Business in China
The first time this story came to my attention was when the Wall Street Journal reported on the signing of the pledge, a joint letter written by the Chinese Ministry of Industry and Information Technology.
According to an article in the National Review, “The letter — which uses language popular with Chinese president Xi Jinping and the ruling Communist party — also highlights how Tesla is navigating an increasingly fraught US-China business landscape and rising competitiveness in the world’s biggest EV market.”
According to a translated version of the pledge, the companies promised to “carry forward the socialist core values, actively fulfill social responsibilities, take an active role in stablizing growth, strengthening confidence and preventing risks.” They also committed to “shoulder heavy responsibilities, and work together to make important contributions to national economic growth.”
Stated more simply, the pledge contained four points:
- not engaging in “abnormal pricing”
- prioritizing quality
- not using false publicity
- contributing to China’s economic growth
And the signatories also expressed a willingness to work in alignment with “core socialist values.”
It is notable that Tesla was the only non-Chinese car company to sign the pledge, because they weren’t the only non-Chinese company present at the event.
There are two ways to operate in China: through your own operation (like Tesla) or by partnering with a Chinese automaker. General Motors and Volkswagen entered the Chinese market through partnerships rather than direct investment. They both had representatives at the event but did not sign the pledge.
Why did Tesla Sign?
It was Tesla representatives, and not Elon Musk personally, who signed the pledge, but it is hard to avoid Musk’s personal perspective when interpreting the choices made at any of his companies.
Elon Musk has come out in the past and stated his support for socialism. In 2018, he tweeted, “I am actually a socialist. Just not the kind that shifts resources from most productive to least productive, pretending to do good, while actually causing harm. True socialism seeks greatest good for all.”
Twitter is banned in China (a bit of irony), but this is more likely a matter of money.
China is Tesla’s most important overseas consumer market and manufacturing hub. Approximately half of Tesla’s global deliveries in Q2 2023 were manufactured at the Gigafactory in Shanghai, Tesla’s first outside the U.S.
Gigafactory Shanghai is capable of producing 750,000 EVs annually, and they are then sold in China, Japan, and Europe. The Gigafactory’s exports helped China pass Japan to become the world’s top automobile exporter in the first quarter of 2023 (Reuters).
China offered Tesla significant incentives to build the factory. They were given access to cheap land, low-interest loans, and tax incentives. In exchange, China hoped Tesla would accomplish three things: ignite consumer demand for EVs, help local suppliers mature, and support smaller Chinese EV manufacturers.
And it worked…
The suppliers that support Tesla’s Gigafactory have expanded what China’s EV manufacturers can produce. China brought in Tesla to increase competition – both among manufacturers and within the automotive supply chain. Tesla did exactly that… although not in the way China intended.
Fighting an Overseas Price War
Earlier this year, Tesla triggered a price war in China that particularly affected their smaller EV manufacturers. They cut prices between 6 and 13 percent.
China wanted Tesla to open the factory and spark demand, but they also offered incentives to consumers to buy EVs. In 2022, 30 percent of all cars sold in China were EVs. Demand doubled year over year. Once those incentives dried up at the end of 2022, inventory started to pile up. Tesla just needed to move those cars.
Unfortunately for the other automakers, the Chinese EV market is too fragmented. Smaller companies have been struggling to stay in business, and they didn’t have the depth of resources required to survive a price war. China wanted competition, but not too much competition. As Yahoo Finance Automotive Reporter Pras Subramanian said, they were making sure everyone survives, not starting a race to the bottom.
Oops. Someone should have told Elon Musk.
Signing the Pledge
On July 6th, the 16 automakers came together to sign the pledge. But the story doesn’t end there.
On July 7th, the very next day, Tesla offered customers in China a $484 rebate/referral for each Model Y or Model 3 purchase. I’m assuming that does not count as “abnormal pricing.” Let’s just call it “creative.”
But on July 8th, things got even stranger. The China Association of Auto Manufacturers (CAAM) retracted the part of the pledge about “abnormal pricing.” It violated Chinese antitrust law and was illegal. CAAM said it would urge association members to comply with antitrust laws and compete fairly with independent pricing.
Here’s what’s funny: That part of the pledge was intended to prevent activities that would disrupt fair market competition, and then it was retracted because it disrupted fair market competition.
Tesla stands alone as an outsider in this market. Executives from JP Morgan, Starbucks, and Apple have visited China, but none of them have gotten the same reception from China that Elon Musk has.
In 2020, Tesla became the most heavily subsidized electric vehicle maker in China. They received about $325 Million in government subsidies, the highest amount granted to a car manufacturer in the country.
But still… why did Tesla sign the pledge?
Did Tesla know the pledge would be overturned? Did they maneuver behind the scenes to point out to someone that the pledge was illegal – making an act of going along with the request while ultimately getting what they wanted at the same time?
Was Tesla making clear that they only signed the pledge as a token gesture when they rolled out their referral program the very next day? It is impossible to know… but we can say with certainty that for all the benefits of doing business in China, the costs are just as high.