Tesla Wants a Plant in China... Right by the Raw Materials

Jacob Harper  |

Tesla Motors (TSLA) has always been able to strike a crucial balance between exclusivity and popularity, both keeping their cars in hot demand while maintaining a production level commensurate with a $25 billion dollar company. Or at least somewhat commensurate, as their profit-to-earnings ratio has always been stratospherically high, leading to allegations that the company’s stock is over-hyped without the profits to back up their sky-high valuation.

In short, Tesla needs to start raking in profits to assuage investors' fears that they simply don’t have the cash to support the hype. They need more revenue. That means broadening their global presence – and with the April 21 announcement of plans to build a manufacturing plant in China, it’s pretty clear where Tesla wants to start.

Tesla just began selling cars in China recently, albeit it with a pricey import tag, something locally produced Teslas would not carry. CEO Elon Musk hasn’t set a hard-and-fast timeline on when his company would expand into producing in China, though he indicates he’d like it to be within the next three to four years. The obvious benefit of having a plant in China is that Musk could sell Teslas in China for much cheaper – 25 percent cheaper, in fact, by avoiding the costly import taxes levied by the Chinese government.

The less obvious benefit for Tesla moving some production operations overseas concerns raw materials. Specifically, the crucial raw materials Tesla uses to manufacture the massive electric batteries that power their vehicles.

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When discussing the sourcing of the rare earth metals and minerals crucial to the manufacturing of their car batteries back in March, a spokesperson for Tesla reiterated that the company would only source its raw materials from North America. This is of special importance considering the world’s largest mines that produce graphite, the key material in Tesla car batteries, are located in China.

The Chinese graphite plants, however, are notorious contributors to the country’s infamous pollution, causing the government to shut down several of them in recent years. Being in league with dirty mines certainly runs antithetical to Tesla’s selling point as a green energy company.

However, one of the other major reasons Tesla declined using raw materials with China was due to the pollution associated with shipping tons of graphite to North America. Of course, were a plant to be located in the same country as the mines which produce their raw materials, transatlantic shipping becomes a moot point. That is, if batteries will be produced in China, or whether the theoretical plant will still leave that crucial part of the business in the States.

As a likely result of the plans to internationally expand production, Tesla’s stock had risen 3.30 percent to hit $204.65 a share by midday trading on April 21.

Watch the video from Bloomberg on the announcement below:



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