Tesla, GM hit by China trade war, Daimler tests in Beijing

Tesla, GM hit by China trade war, Daimler tests in Beijing

As Tesla, GM, and other automakers wake up to the implications of a global trade war, Daimler is partnering with Baidu and testing autonomous vehicles in Beijing. Chris Middleton looks at the complex effects of the trade war on electric and autonomous vehicle production.

Electric car company Tesla has become one of the first automakers to be hit by the trade war between the US and China.

According to the Tesla China website, local prices of the company’s Model S and Model X vehicles have risen by approximately 20 percent.

On Friday, the battle between the world’s largest and second largest economies ceased being a war of words and became a full-blown financial battle, with the US imposing 25 percent tariffs on a broad range of goods, components, and parts imported from China.

The basket of 818 goods includes: electric bikes and scooters; industrial robots and machinery; machine parts; smart thermostats; LEDs; optical scanners; disk drives, smart cards, optical media, tape drives, and computer storage devices; electrical components; wires and cabling; conductors and semiconductors; imaging systems; spectrometers; radar equipment; lasers, flat-panel displays; lithium batteries; medical equipment; and planes, trains, automobiles, ships, and spacecraft – along with associated engine parts.

As that basket of items reveals, the electric and autonomous travel sectors will be among the most seriously hit by the battle for economic dominance, hitting not only buyers of goods from China, but also users of Chinese parts and components.

In total, $34 billion of imports will be affected by tariffs that are designed to impact on China’s growing industrial and technological strength. China’s own retaliatory tariffs also took effect on Friday, targeted at US agriculture, oil and energy production.

Editor’s note: On 10 July, China upped the tariffs on US-made optical fibre products to between 33.3 percent and 78.2 percent, compared with a range of 4.7 percent to 18.6 percent, set in 2011.

Crunch point for Tesla

China has been one of Tesla’s core markets, with 2017 sales there doubling year on year to over $2 billion – roughly 22,000 vehicles based on their average sale price.

The price hike is likely to put a dent in demand for Tesla’s vehicles in China and could pose serious problems for the electric vehicle maker, which is working towards introducing more autonomous driving capabilities this Summer.

The company has struggled financially in recent months, and in June, Tesla announced that it was cutting nine percent of its workforce, in what founder and CEO Elon Musk described as both a “difficult, but necessary reorganisation” and a “comprehensive organisational restructuring”.

In Tesla’s May earnings call to analysts, Musk said that the production location for the Model Y, due for launch in 2019, had not been decided. “We’re really crowded here at Fremont,” he said. “So we’ll try to figure out what the optimal location is for Model Y production, but it’s not here. Not here at Fremont.”

He added: “I think Model Y is going to be a manufacturing revolution. It will be, I think, incredible from a manufacturing standpoint, because we do not want to go through this [Model 3] pain again.”

In June, the company announced plans to build its first non-US factory in Shanghai, and it’s conceivable that Tesla might shift production of the Model Y there for the vehicle’s 2019 rollout. However, that would now have the knock-on effect of making the cars more expensive in the US.

To look for a large-scale manufacturing base in the US as an alternative to China would dramatically increase Tesla’s costs at a critical point in the company’s history, and may force it to raise more investment in order to stay in business, diluting the value of existing investors’ holdings.

Daimler tests autonomous cars in China

In related news, Daimler has become the first international automaker to receive a road test licence for Level 4 autonomous vehicles testing in Beijing. Mercedes-Benz test vehicles will now begin trials on public roads in the Chinese capital.

To qualify for the licence, Mercedes-Benz vehicles, equipped with additional systems from China’s Baidu, undertook extensive testing at the National Pilot Zone for Intelligent Mobility.

Daimler has been engaged in research on safer automated driving in China via Baidu’s open source Apollo platform.

Internet of Business says

The complexities of the ongoing trade war reveal that punitive tariffs on Chinese-made goods and components do not have simple outcomes, as the US government appears to believe.

China is the world’s most populous nation and the fastest-growing auto market, and so succeeding there is a must for all US car makers.

Fifty-eight percent of Chinese citizens now live in cities, where the urbanisation rate is estimated at 2.3 percent a year. So designing smart solutions for a newly affluent, middle-class, urban population of car users in their 20s and 30s is the long-term strategic goal.

The development of autonomous, electric and driver-assisted vehicles is the direction of travel for the entire car industry, and so succeeding in China demands partnership with Chinese authorities and technology companies, such as Baidu.

So the trade war will have a serious impact on those essential partnerships, and on any US companies that base manufacturing in China, in order to benefit from lower labour costs, economies of scale, and easier, cheaper distribution to a local market of over 1.3 billion consumers – particularly if those products are then exported to the US.

One such company is General Motors (GM).

The Buick Envision SUV was designed and is manufactured in China by Shanghai GM. As of Friday, GM has to decide whether to absorb the 25 percent tariffs on Chinese-made goods itself, or pass them on to its customers in the form of significantly higher US prices for its Chinese-made models.

For companies like GM, being forced to shift manufacturing to the US would entail dramatically higher costs and make it much harder and more expensive to sell into the vast and fast-growing Chinese market. At present, China presents a much larger opportunity to US automakers than the US presents to its Chinese counterparts.

In short, many US automakers may move manufacturing to China as a long-term strategic bet, but this will make their cars more expensive for US buyers.

However, if China devalues the yuan renminbi, then this would have the effect of counteracting the trade tariffs and making its vehicles more attractive to US consumers in cost terms, even as some US manufacturers have to raise their prices. Devaluing the currency would also benefit US manufacturers who wish to base their operations in China.

There is no way that the US could respond in kind.

As previously reported on Internet of Business, it is hard to see how the trade war benefits US manufacturing companies, even as China digs in for a war of attrition that it believes it can win.

Plus: GM readies robo-taxis for San Francisco

In related news, GM – whose Cruise division operates the largest autonomous test-car fleet in California – appears to be gearing up to launch a driverless taxi service in San Francisco, either this year or next, according to a Bloomberg report. Meanwhile, GM has installed 18 fast-charging electric stations in the city’s busy Embarcadero district.