Tesla's Shanghai Factory: The Golden Goose that Became a Geopolitical Bargaining Chip
Musk's megalomania is now caught between US national security & China's mandate of "reunification" with Taiwan
Over the weekend, Elon Musk was called out by US Congressman Mike Gallagher (Republican; Wisconsin) for cutting off SpaceX’s connection to US armed forces in Taiwan.
Congressman Gallagher had just returned from a visit to Taiwan with his Select Committee on the CCP and was probably asked by US military officials to confirm this. Gallagher is a 7-year veteran of US military intelligence.
This was Representative Gallagher’s comment: “Multiple sources have disclosed to the Committee that Starshield is inactive in and around Taiwan.”
Musk has until March 8th to reply to Representative Gallagher about why SpaceX cut off communications with US troops in Taiwan, which is an infraction of SpaceX’s contracts with the Pentagon.
This is now the second time that the US government has been playing the fool for Elon Musk, who has twice shifted the odds of victory in a war to the side of his choice: first in Crimea and now in Taiwan.
Below is the following:
Best & worst scenarios
Why China needs Tesla
How Tesla needs China (70% of profits)
Why Musk is seriously on the CCP’s side
Best & Worst-Case Scenarios for Tesla vs the CCP
The best-case scenario is that the CCP ignores Musk giving US troops in Taiwan access to Starshield communications. Maybe the PLA fly more sorties over Taiwan, but this is tolerable.
The bad-case scenario would be that the CCP orders a boycott of Tesla the way they did on Japanese cars in 2012 and Korean cars in 2017. Both saw sales plummet by over 50% for at least 6 months. The Korean carmakers were literally kicked out of China. But, unlike the Japanese and Koreans, Tesla has much more exposure to China (see Figure 1 below) and much less capital to help itself.
The worst-case scenario is that the CCP stops production at Tesla’s Shanghai factory, which they can do because they own the land on which it operates. This would likely cut Tesla’s profits by at least 65% in one fell swoop (see Figure 1). Unlike Apple—which also has a huge production base in China—Tesla owns all of its manufacturing equipment in China (Apple outsources it to Foxconn).
Why the CCP Needs Tesla
Tesla has created over 100,000 jobs at local suppliers in the Yangtze River Delta, China’s Detroit.
Tesla brought 60 Chinese suppliers into its global supply chain and they’re now setting up shop in Mexico to supply not only Tesla but EV giants like BYD who can bypass the 27.5% tariff on China-made cars in the US by shipping from NAFTA-legal Mexico (for now).
The production value of Tesla Shanghai in 2022 was reported to be 183.9 billion yuan ($27.3 billion) or 25% of Shanghai’s automotive production. That increased to an estimated 240.3 billion yuan ($35.7 billion) in 2023 and should be over a quarter of the overall automotive production value in Shanghai, which is likely in a recession right now.
Loss of Tesla’s China Plant Would Cut Profits by 70%
Tesla’s disclosures are the worst in the auto industry, but they do disclose “domestic” and “foreign” pre-tax profits in their annual 10-K reports.
Tesla also discloses revenues by region, albeit, only for the US, China & “Others” (“Others” is over 30% of 2023 revenues). Both the revenue and pre-tax profit numbers are based on point of sales recognition.
Figure 1 shows my estimates of the weight of China given Tesla’s disclosures and it’s roughly 73% of profits over the last 3 years.
In 2023, it was an estimated 65%, but it was likely more due to the heavy weight of Tesla’s Energy division. If Tesla lost its production in Shanghai, the stock would plummet.
These are the reasons why Tesla’s Shanghai plant is so profitable and why Tesla would suffer without it:
Labor costs are 1/17 of that in the US.
Local shipments make little profit, but exports (36% of output) generate massive profits due to higher prices overseas & the weak yuan. Hence the estimated pre-tax margin of 30% in 2023.
Tesla’s tax rate has been only 15% since the start of production in Shanghai in 2019 but is now 25% as of 2024. That’s a major impact on Tesla’s bottom line, globally.
Tesla knew this since 2018, which is why they slow-rolled their new German factory to juice the most that they could out of their low-cost Shanghai operations in 2023.
Q4 exports from Shanghai were down 26% YoY. Proof that they’re focusing on the German plant in light of higher taxes in China.
Figure 1: Tesla Made 72% of Pre-Tax Profits in China Since 2021
Source: Company data & Motorhead estimates
Why This Matters: Musk is a CCP Lap Dog
Usually, I have tons of numbers and graphs to bore you with. But today, it’s different.
Below are recent quotes from Musk chirping praises for China, which shows how much of a CCP lap dog he is.
Musk’s praises for the CCP:
Regarding AI, Musk said “China will be great at anything it puts its mind to” last July.
"The China space program is far more advanced than most people realize" in a May 2023 tweet from a China trip.
Tweeted anti-Fauci things in 2022, but never said Fauci helped the lab leak in Wuhan, like most conservatives do.
“China rocks in my opinion. The energy in China is great. People there — there’s, like, a lot of smart, hardworking people. And they’re really — they’re not entitled; they’re not complacent. Whereas I see in the United States increasingly much more complacency and entitlement, especially in places like the Bay Area and L.A. and New York.” Musk on an Automotive News podcast in July 2020.
"Their (Beijing's) policy has been to reunite Taiwan with China. From their standpoint, maybe it is analogous to Hawaii or something like that, like an integral part of China that is arbitrarily not part of China mostly because ... the U.S. Pacific Fleet has stopped any sort of reunification effort by force," Musk said in 2023.
"My recommendation would be to figure out a special administrative zone for Taiwan that is reasonably palatable, probably won't make everyone happy," Musk told the Financial Times in October 2022.
It’s utterly mind-boggling how the US government still hasn’t taken away Musk’s security clearance.
"My recommendation would be to figure out a special administrative zone for Taiwan that is reasonably palatable, probably won't make everyone happy."
This is, without a doubt, the single dumbest thing that Musk has said on this subject (although not the single dumbest thing he has ever said on any subject - there is far too much competition for that title). I guess that the world's greatest super genius has never heard of "Hong Kong" and the wonderful experience it is having with being a special administrative zone of China.
What a moron.
Sooner or later, everyone gets Musked.