Given the high tariffs that nation has imposed on imported cars -- it just raised them to 40% -- this is Tesla's best chance to capitalize on a massive market in a country where the government is enthusiastically pushing for the wider adoption of electric vehicles. Interestingly, it's skipping the most popular strategy for automakers operating in China. How else will this impact the business? The duo discuss all this, and more.
A full transcript follows the video.
This video was recorded on July 11, 2018.
Mac Greer: Let's move on and talk some Tesla. Tesla is opening its first factory outside of the United States. On Tuesday, CEO Elon Musk reached an agreement with the Shanghai government to open a factory in China -- a factory with the capacity to build 500,000 cars a year. Aaron, what does it mean for Tesla?
Aaron Bush: China is a really important market for Tesla. It's their second largest market outside of the U.S. Last year, they sold 17,000 cars there. Given the sheer population size of China, and their efforts through regulation to make electric vehicles more prominent, I think China presents huge upside for Tesla if they can get it right. I'm excited to see them coming in here.
The second piece of it is more political. Last Friday, auto import tariffs to China were raised to 40%. If you're trying to sell a U.S. car in China, it's a 40% tariff. Tesla has already had to raise prices 20%, but prices for cars aren't that inelastic. A way to get around the terrible pricing and what they have to give up to the government, they're just going to go straight to China and build there.
What's interesting about this to me is that most companies, manufacturers, entertainment companies, whoever, they go in with joint ventures, they partner with Chinese companies that can help them navigate the political waters and build more specifically for that region. Tesla is going it alone. There's some risk in that. They do have, Tencent owns 5% of Tesla. But, if all goes well, they will own 100% of the revenue that comes from China, which could be a big deal.
Greer: Aaron, I don't know if there's a company that elicits stronger opinions -- bull, bear -- than Tesla. I'm curious, when you look at Tesla writ large, what's your biggest question going forward?
Bush: I think the largest question around them is, will they be able to raise capital in an investor-friendly way? For example, raising these new manufacturing facilities is going to take a ton of money. It's probably only going to be three or four years from now that they actually start producing in a meaningful way. But it'll cost a billion dollars to get there.
There's more going on than just this one factory. Tesla already has a lot of debt. All of these opportunities are fascinating. No one doing a better job pursuing them than Tesla. But, the accounting, the balance sheet issues, I think that could pose real issues. I don't really know. I could see it going either way. I wish I had a stronger opinion. But, that's definitely what has me a little paranoid right now.
Aaron Bush owns shares of TCEHY and Tesla. Mac Greer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends TCEHY and Tesla. The Motley Fool has a disclosure policy.