By CCN.com: Two months after Tesla CEO Elon Musk broke ground for a new factory in Shanghai, authorities in China suspended customs clearance procedures for the electric carmaker’s lowest-priced car, the Model 3.
China Holds Tesla Model 3s Hostage
According to Caixin Global, customs authorities in Shanghai are currently holding 1,600 Tesla Model 3 cars after finding various irregularities.
Some of the irregularities included improper labeling. Per the General Administration of Customs (GAC), there were missing labels as well as labeling inaccuracies, according to Caixin:
“Some of the vehicles had no Chinese labels on brake fluid tanks, while some demonstrated a real motor capacity that differed from the one on the label, according to the General Administration of Customs.”
Michael J. Coren
Tesla reaches deal after China halts sales of Model 3
Tesla needs China. That relationship seemed on the rocks this week when Chinese media reported customs officials were holding 1,600 Model 3s for import violations and subjecting new imports to heightened scrutiny.
The General Administration of Customs (GAC) reportedly accused Tesla of omitting Chinese labeling on components and mislabeling motor capacity. The GAC suspended sales of Tesla’s Model 3s. The stock price dropped as much as 5% on the news this week. But as of today (March 5), Reuters reports that Tesla has resolved the issue, allowing sales and imports of the Model 3 to resume.
Update: A Tesla spokesperson told Quartz on March 5 that the “error resulted from misprinted labels on certain Model 3 vehicles. We have already reached a resolution with Chinese customs, and we are working closely with them to resume clearance procedures on these vehicles. Sales of Model 3 in the country are not impacted, and we continue to deliver Model 3 vehicles that have already been processed.”
China is key to the electric automaker’s future prospects. The company is moving beyond luxury vehicles, launching its long-awaited $35,000 Model 3 last week. It’s also leaving behind enviable profit margins from its luxury Model X and Model X vehicles (priced at $76,000 and above) so it can concentrate on the mass-market Model 3, priced just below the median US price for light passenger vehicles, as well as a crossover and a pick-up truck expected to arrive in the next two years.
But that will mean producing massive volumes of cars, which is where China comes in. Tesla is building a massive new factory in Shanghai that will churn out 500,000 cars each year. Government incentives and an EV-friendly public means China already accounts for about half of the global EV market, a share Bloomberg New Energy Finance (BNEF) expects China will maintain even as the global market for EV explodes. By 2025, BNEF predicts 19% of all passenger vehicle sales in China will be electric, compared to 14% in Europe and 11% in the US.
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China is a key market for Tesla, but keep expectations ‘very low,’ Morgan Stanley says
Tesla (TSLA) has ambitious growth targets in China that make Morgan Stanley “cautious,” exemplified by recent trade issues, analyst Adam Jonas said in note to investors Wednesday.
“After Chinese authorities temporarily suspended customs clearance for imported Model 3s, citing ‘irregularities’ including improper labeling … we would keep medium/long-term expectations for Tesla’s ability to run a profitable Chinese business very low,” Jonas said. Jonas is widely followed on Wall Street due to his early work covering Tesla and electric vehicles.
Tesla said on Tuesday that the company has “already reached a resolution with Chinese customs , and we are working closely with them to resume clearance procedures on these vehicles.”
While that resolution is good for Tesla in the status quo, Jonas said the issue “highlights the risks inherent” to U.S. automakers and technology companies who want to conduct business in China – especially for areas “that may become sensitive along the grounds of data privacy, cybersecurity, robotics, and [artificial intelligence].”
President Donald Trump continues to push hard for a trade deal with China and Jonas believes that the result of those negotiations will likely be very important to Elon Musk’s company.
“Tesla’s future in China may be highly dependent on a constructive trade relations and economic policies with the US,” Jonas said.
Jonas also gave several more reasons he said Morgan Stanley will “remain cautious on the role of China in Tesla’s long germ commercial strategy and fundamental value,” including:
- The “unquantifiable risks” from technology transfers between American and Chinese companies.
- There are “dozens of Chinese domestic EV startups” that could eat market share from Tesla.
- China’s government controlling its auto industry as “a public transport utility operated as a public good,” which “may limit the role of foreign entities.”
Morgan Stanley has an equal weight rating on Tesla shares and a $283 price target, or about 2.4 percent from Wednesday’s open.