Apparently US$34 billion isn’t enough.
Trump could release another list of tariffs. This new list could tax another US$200 billion worth of Chinese goods.
Chinese officials said they will return the favour in kind. They will match US tariffs dollar for dollar.
Still no end in sight for this trade spat. But I’d expect it to die down sooner or later.
It doesn’t take a genius to know tariffs hurt business. Sure, those that can’t compete in a regulatory free world benefit. But it’s at the expense of the more productive low-cost producer.
But so what? Who cares if businesses feel a bit of pain?
Tariffs also affect you in a big way.
Low-cost goods that merchants once bought from China are no longer low-cost. But businesses will make their margins. You can be sure of that. And to make them, they’re going to push the costs onto you.
It’s how Tesla, Inc. [NASDAQ:TSLA] got around Beijing’s 25% tax on American-made cars. They jacked up their sticker prices by 20%. South China Morning Post (SCMP) writes:
‘The price adjustment came just six weeks after the US electric carmaker reduced prices following China’s decision to cut car import duties.
‘A mainland buyer will pay an additional 139,320 yuan (US$21,045) for a Model S 75D which currently sells for 849,900 yuan.’
So why should Tesla venture into China at all?
Why not just hold off until this whole trade spat goes away?
It’s because China is far too important in Tesla’s grant plan. More on that later.
Tesla doesn’t just want to sell electric vehicles in China. They want to build them in the Middle Kingdom too. It’s one way to get around the tariffs I guess.
From The New York Times:
‘The automaker said Tuesday that it had reached an agreement with the Chinese authorities to build a battery and automobile factory in Shanghai — its first plant outside the United States — that would eventually be capable of producing 500,000 electric vehicles a year.
‘The company did not disclose how much it planned to invest in the venture, but it said it would be the sole owner. Other foreign automakers, including General Motors, Volkswagen and Toyota, have been required to form joint ventures with local partners to produce cars in China. But the Chinese government recently said it would ease that requirement.
‘Tesla said it expected to begin construction as soon as it had obtained the necessary approvals and permits. “From there, it will take roughly two years until we start producing vehicles and then another two to three years before the factory is fully ramped up,” the company said in a statement.’
Another huge challenge…? I thought Tesla had enough of them already. God knows the company is terrible at meeting deadlines.
But this is part of the plan, Tesla devotees say.
‘He (Elon Musk) thinks in terms of “moonshots,” or “big hairy audacious goals,” which aren’t guaranteed to succeed, and can’t be done on a firm quarterly schedule…Considering Tesla’s stock market performance and the company’s legions of adoring fans, it’s clear that most people value accomplishment over punctuality,’ a Tesla fan wrote.
And what is it that Tesla hopes to accomplish? To roll out Teslas all over the world? To save the planet from pollution? To create value for shareholders?
I’m guessing the latter is last on the list. But let’s hope it’s on Elon’s mind nonetheless.
For many shareholders Tesla is a long-term play. They don’t expect to double their money next year or the year after that. Similar to Amazon.com, Inc. [NASDAQ:AMZN], shareholders have bought into Musk’s grand plan.
And that plan cannot work without China.
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The China question…
China will be the most important market for a lot of goods in the years to come. That will apply to EVs as well.
China’s massive population floods into congested cities. Their mode of travel makes some cities unliveable on bad days. It’s not unheard of for more than a million people to die annually in China from pollution.
It’s why the Chinese government has subsidised EVs. Earlier this year China even increased subsidies for longer ranged EVs from 44,000 yuan to 50,000 yuan.
Then there’s China’s massive growing middle class to consider.
As millions more rise into a new income bracket, the market for autos and other lifestyle products will increase dramatically.
In 2017, China was already home to more than 1.2 million EVs. JPMorgan believes Chinese consumers could buy up to 12% of EVs globally by 2025.
Last year, that figure was 2.3%…
It’ll only be a matter of time before Tesla reaps rewards from all the hard work they’ve done. It’s what most shareholders are thinking I’m sure.
To make a profit they need to buy back Tesla stock at a price lower than what they sold it for.
Many of these short sellers argue the robustness of Chinese demand for EVs and EV demand in general.
At the moment subsidies are bolstering demand. In places like northern Europe, EV demand is sky-high. And that’s because governments offers extremely generous subsidies.
But what happens when these subsidies go away?
When this happened in Norway, EV sales were put into reverse. The Norwegian government trimmed subsidies slightly. The result was an extra US$8,850 on a Tesla Model X.
Will the same happen if China cuts EV subsidies?
Chinese consumers are like any other. If you give them an option of a more expensive BMW EV or a cheaper gas guzzling model, they’ll pick the cheaper option.
While I have little insight into the future demand of EVs, if prices don’t come down subsidies might not be enough to fulfil Tesla’s dreams. It might only be a matter of time before the short sellers start seeing profits.
Editor, Money Morning