Tesla's New Chinese Subsidiary Signals a Big Announcement on the Horizon

Tesla Inc. (TSLA) is stepping up its exposure to China -- and that points to a big announcement on the horizon.

Electrek reports that Tesla has registered a new company in Shanghai's Free-Trade Zone, a move that suggests an official China Gigafactory announcement could be right around the corner. During Tesla's first-quarter earnings call on May 2, Elon Musk told listeners that the company was close to announcing its plans for a Chinese factory.

The establishment of Tesla Shanghai Co. Ltd. as a wholly-owned subsidiary of Tesla's Hong Kong division adds some extra evidence that a Chinese Gigafactory announcement is right around the corner.

According to Musk, any new Gigafactory will include both battery manufacturing and car manufacturing facilities, giving Tesla a way to sell its entire suite of products directly into the Chinese market without the added costs of importing finished goods.

The timing couldn't be much better for Tesla.

A rendering of Tesla's Gigafactory in Sparks, NV when completed. Source: Tesla Inc.
A rendering of Tesla's Gigafactory in Sparks, NV when completed. Source: Tesla Inc.

After all, China just announced that foreign companies can now have 100%-owned factories in the country. At the same time, the latest electric vehicle sales data Friday showed that EV sales in China rose 149% over the past year, to 225,000 units in the first four months of 2018.

That made China responsible for approximately half of all EV sales in the first quarter of the year, thanks in large part to an aggressive policy of government mandates for electric vehicle adoption.

One in ten new passenger vehicle sales in China from major manufacturers must be plug-in electric next year.

Tesla has found considerable early success in China. The country was Tesla's fastest-growing market in 2018, even with a substantial 25% import tariff tacked on the sticker price of its cars. With those tariffs pledged to be lowered, the introduction of the Model 3 (to much consumer interest at the Beijing Auto Show last month), and the possibility of much lower costs for Tesla vehicles manufactured in China, that growth could accelerate in the years ahead.

The very hurdles that have gridlocked a Chinese Tesla factory are all being lifted at once. A wholly-owned Tesla Gigafactory in China looks imminent -- and it has the potential to give Tesla crucial advantages in the company's fastest-growing market.

Meanwhile, Tesla's stock price continues to test a key breakout point at the $310 level. At this point though, it's still a little early to pull the buy trigger -- buyers and sellers still haven't quite worked out who's in control of things. But we'll find out who's in charge soon enough.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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