The Target on Tesla’s Back

Brit Ryle

Posted July 26, 2023

I’ve warned before that Tesla (NASDAQ: TSLA) could be particularly vulnerable to China’s capricious policies and would make a pretty good target if China really decided to retaliate against U.S. restrictions on China’s access to high-end semiconductors.

Tesla makes more than half its cars in China, and gets around half its revenue from sales in China. 

China is very active in supporting its EV market. It’s the world leader for both lithium ion and lithium phosphate batteries. It is the biggest supplier of refined lithium for the batteries. And it also dominates the global market for refined rare earth minerals. 

Now, as we’ve discussed before, the fact that China is the global leader for refined rare earths and lithium might be a little misleading. China does not have the biggest supply of either mineral within its borders. It imports unrefined lithium and rare earth ore and then does the dirty work to make them useful.

One U.S. company – MP Materials – produces 15% of the world’s rare earth ore, and ships most of it to China to be refined and turned into rare earth magnets.

It’s true that China has been very aggressive in securing lithium supply by buying mines outright or partnering with foreign miners, China’s dominant position as the world’s biggest lithium producer  is a relic from the days of globalization, when we still believed that all the countries of the world could play nice together, motivated by economic benefit. 

Of course we know how that worked out…

Now, countries like Australia, Chile and Canada are taking steps to block China from securing more access to lithium mines. China’s share of lithium mining has fallen from 95% a decade ago to 58% today. That share will keep falling. 

And MP Materials is in the process of firing up its own refining facility, signing refining deals in Vietnam and bringing its own rare earth magnet factory online in Texas. China’s share of the rare earth market is falling too. 

Self-Sustaining Economies

The ultimate goal for countries these days is to make their economies as self-sufficient as possible, and, where that’s not possible, to sign trade deals with friendly neighbors that can be trusted. 

As you know, that’s the basic motivation behind rerouting trade routes, bringing manufacturing back to the U.S. and renewing trade (and defense) agreements with allies. 

China is getting the short end of the stick from this trend. Yes it has benefited from cheap Russian oil but that’s about it. 

Agreements between the U.S., Japan, South Korea and Europe has essentially cut China off from high-end semiconductors and the equipment needed to make them. And the U.S. (for one) is revising rules on investment in China. 

So, China’s massive assistance for its domestic EV market was obviously a smart move. It’s also increasingly critical to China’s economic future. 

China’s BYD (BYDDF) is the biggest EV maker in the world. In the second quarter (April-June) BYD sold 703,000 cars, compared to 446,000 for Tesla. And BYD’s market share in China is around 40%.

You may recall the news from earlier this year that Tesla was cutting prices in China in order to expand its market share. 

You may also recall Tesla shares getting whacked pretty good last week when it reported that it’s gross profit margins fell…

Curiously, BYD didn’t suffer from any declines for its gross margins. And that’s because the Chinese government subsidizes its domestic EV makers. 

China subsidizes its domestic battery makers like CATL, too — which is the biggest EV battery maker in the world. 

Not In My Back Yard

India just rebuffed a proposal from China’s BYD to build a $1 billion manufacturing plant in the country. 

A few months back, the state of Virginia said no to a joint operation to make EV batteries between Ford and CATL…

Michigan approved the project, but Congress stepped in and is reviewing the national security aspect of the venture. Congress is also pondering whether it can use the EV tax credits from the inflation reduction act — which require components to be made in the USA — if Ford plans to forge ahead with the CATL partnership.

Congress is also taking a look at Chinese companies like Baidu (NASDAQ: BIDU) that are testing autonomous vehicles in the U.S. in the name of national security. 

And it looks like China may be responding. 

Apparently, China is concerned that cameras built into Tesla vehicles could be used for spying…

This morning, Bloomberg reported that Tesla cars will be banned from certain areas of Chengdu (a city of 21 million) that will be hosting the World University Games between July 28th and August 8th. Xi Xinping is expected to visit the games at some point. 

Bloomberg goes on to say that Tesla cars have already been banned from certain military complexes and housing compounds, as well as from a district that hosts Communist Party summer retreats.

Maybe it’s nothing. Maybe being told that you’re not allowed to drive your Tesla in certain areas of China won’t affect sales.

Seems to me that Tesla is pretty exposed to the whims of the Chinese Communist Party. And as tensions continue between the U.S. and China, the target on Tesla’s back might get bigger.

Briton Ryle
Chief Investment Strategist
Pro Trader Today