Can Tesla’s share price withstand new regulations in China?

Tesla’s [TSLA] share price might be down circa 11% so far this year (as of 28 May’s close), but that’s not down to its success in China.

As the Chinese automobile market rebounds, Tesla is seeing brisk sales.  According to a filing with the Securities and Exchanges Commission, sales in the country came in at over $3bn in the first quarter, well up on the $900m in the same period last year. For comparison, the US, which is Tesla’s biggest market, represented $4.4bn in sales, up from $2.8bn year-on-year.

Building cars in China is helping to keep costs down. Tesla, which has a gigafactory in Shanghai, said in the filing that the combined average cost to produce its Model 3 and Model Y vehicles fell “due to lower material, manufacturing, freight and duty costs from localized procurement and manufacturing in China”. Being able to build in the country means getting along with the ruling communist party, even if the US government is taking a hard line.

  

Does Tesla’s share price depend on China?

Tesla’s share price has an average $661 price target from analysts tracking the stock on Yahoo Finance - a 5.7% upside on the Friday’s close. Hitting that or back to its $900.4 52-week high will depend on delivering more profitable quarters and maintaining its position at the top of the EV pyramid. And that hinges on maintaining strong sales in China.

Yet data protection questions are never far in the rearview mirror for companies operating in the country. New requirements from the Chinese regulator mean that foreign carmakers who collect data through cameras and sensors will have to store the information locally.

To comply Tesla will open a data centre in the country to handle the ‘localisation of data storage,’ with more facilities planned, according to TechCrunch. This follows Apple’s plans to store personal data on servers owned by a state-run firm and shows how western companies are accommodating Beijing’s demands at a time of diplomatic sabre-wrangling.

Still building relationships with the Chinese government hasn’t meant Tesla has had an easy ride in the country. This year, the company appeared before regulators to answer questions on the safety of its Shanghai made vehicles. Reuters also reports that Tesla has called off plans to buy more land to expand its Shanghai production capacity over fears it would incur a Trump-era 25% charge on automobiles arriving in the US from China.

Other difficulties include the Chinese military banning Tesla cars from entering its complexes due to concerns around the cars’ cameras and restrictions on military personnel and other key staff driving Teslas.

 

China’s importance for western automobile manufacturers

Beijing ramping up its scrutiny is unlikely to be limited to Tesla, yet foreign automobile manufacturers don’t have much of a choice if they want to operate in the largest automobile market in the world.

And it's a growing market. New vehicle sales in the country are expected to grow 4% to more than 21m this year, according to China Association of Automobile Manufacturers figures released in January. Sales of electrified vehicles - including hybrids and fuel cell powered vehicles - are expected to grow 40% to 1.8m, according to officials at the trade group.

General Motors [GM] delivered 780,000 vehicles in China in the first quarter of the year, up 69% year-on-year. Along with sales increasing in its Buick, Chevrolet and Cadillac brands, GM’s China facing Wuling business saw sales double to over 347,000 in the first quarter. Ford delivered 153,822 vehicles in China during the quarter, up 73.3% year-on-year, while Nissan's [7201.T] light vehicle business saw a 70.6% increase in unit sales for the same period.

  

Germany’s Volkswagen [VWAGY], which is tipped by UBS analysts to rival Tesla as a leader in EVs in the coming decade, saw its sales rebound  60% in China in the first quarter. At the same time, the EU was raising concerns over China’s human rights records.

As the biggest car market and second-biggest EV market on the planet, China is a market that no multinational automobile manufacturer can ignore - especially as it's still growing. If these companies want to operate relatively unhindered in the country, then they will need to comply with Beijing - even if their own governments ramp up the rhetoric.