Why Tesla Needs China More Than China Needs Tesla
Tesla
On October 22   Tesla  announced a landmark agreement to manufacture cars in China  building capacity to produce locally and boost sales in the worldâs largest market for electric vehicles.
The agreement is a landmark deal in several respects. China has granted  Tesla  more autonomy than other foreign producers.  Tesla  is the first major foreign automaker to establish local operations without a 50:50 local joint venture partner. This is a key concession as  it  allows  Tesla  tighter control over both  its  intellectual property and vertically-integrated production process.  Tesla  will also benefit by reducing production costs for cars sold in China and  though details were not disclosed  may also receive tax breaks and subsidies akin to those enjoyed by Chinese producers.
 Attracting Tesla  is a symbolic win for China. China has clear ambitions to lead the world in electric vehicles in a broader effort to build a cleaner  environmentally-conscious society. The timing of this announcement during Chinaâs critical 19th Congress reinforces the governmentâs broader objectives.
Yet  a closer look suggests that  Tesla  needs China more than China needs  Tesla . As the chart from IHS Markit: Light Vehicle Forecast below shows  China is an essential market for leading global automakers. China surpassed the United States in 2009 as the largest car market  and car sales in Western markets are forecast to decline  while emerging markets will drive global growth.
With its recent shift in environmental priorities  China is also becoming a major player in electric vehicles. In 2016  China accounted for 45% of all the newly registered electric vehicles worldwide with 336 000 in China vs. 160 000 in the United States. China is also building an EV charging infrastructure that primes the market for a high-end producer such as  Tesla . In 2016  China had a 44% global share of publicly available EV charging outlets  including 82% of fast-charging outlets. Demand for electric vehicles has grown faster in China than in any other global market with the share of EV purchases increasing 3.6x from 2014 to 2016. With EV purchases accounting for just 1.37% of the total car market  the Chinese EV market seems poised for further growth.
Low end EV's dominate Tesla
Despite seemingly favorable market conditions   Tesla  has had little success in China to date. Subsidies have driven electric vehicle demand  with the Chinese government paying up to 50% of the purchase price of domestically-produced EV cars. Lower-end electric vehicles have dominated  and  Tesla   which is subject to 25% import taxes  has largely been priced out of the market. In 2016   Tesla  had just a 3% share of the electric vehicle market in China.
 Tesla âs lackluster performance in China is a striking contrast to other global automakers. As in the West  cars are a status symbol in China  and consumers prefer prestigious global brands. Foreign cars claim a 60% market share in China  with foreign brands claiming seven of the top eight spots for cars sold in 2016. Premium brands have done particularly well in China.
Audi  BMW  Mercedes and Porsche all sell between a quarter to a third of their total global sales in China -- a 10% increase on average in just the past five years. In addition  Volkswagen now sells half of its global volume in China. The experiences of other foreign car brands suggest that  Tesla  should fare well in China if  it  can reduce production costs and vehicle pricing in line with the local market.
It is within this context that  Tesla  needs China more than China needs  Tesla . Chinaâs electric vehicle market will grow with or without  Tesla . But Teslaâs deal with the Shanghai government is both timely and essential. As the electric vehicle market takes off in China   Tesla  must do well in this vital market to maintain global leadership. Building volume in China is required to reduce production costs and pricing in the global as well as local market. Ultimately  as we are seeing in other industries   Tesla  may find that technology talent in China will also prove vital to maintain  its  position as a leading innovator globally.
On October 22    [TGT] announced a landmark agreement to manufacture cars in China  building capacity to produce locally and boost sales in the worldâs largest market for electric vehicles.
The agreement is a landmark deal in several respects. China has granted   [TGT] more autonomy than other foreign producers.   [TGT] is the first major foreign automaker to establish local operations without a 50:50 local joint venture partner. This is a key concession as  it  allows   [TGT] tighter control over both   [TGT]   intellectual property and vertically-integrated production process.   [TGT] will also benefit by reducing production costs for cars sold in China and  though details were not disclosed  may also receive tax breaks and subsidies akin to those enjoyed by Chinese producers.
 Attracting  [TGT] is a symbolic win for China. China has clear ambitions to lead the world in electric vehicles in a broader effort to build a cleaner  environmentally-conscious society. The timing of this announcement during Chinaâs critical 19th Congress reinforces the governmentâs broader objectives.
Yet  a closer look suggests that   [TGT] needs China more than China needs   [TGT]  . As the chart from IHS Markit: Light Vehicle Forecast below shows  China is an essential market for leading global automakers. China surpassed the United States in 2009 as the largest car market  and car sales in Western markets are forecast to decline  while emerging markets will drive global growth.
With its recent shift in environmental priorities  China is also becoming a major player in electric vehicles. In 2016  China accounted for 45% of all the newly registered electric vehicles worldwide with 336 000 in China vs. 160 000 in the United States. China is also building an EV charging infrastructure that primes the market for a high-end producer such as   [TGT]  . In 2016  China had a 44% global share of publicly available EV charging outlets  including 82% of fast-charging outlets. Demand for electric vehicles has grown faster in China than in any other global market with the share of EV purchases increasing 3.6x from 2014 to 2016. With EV purchases accounting for just 1.37% of the total car market  the Chinese EV market seems poised for further growth.
Low end  [TGT] 
Despite seemingly favorable market conditions    [TGT] has had little success in China to date. Subsidies have driven electric vehicle demand  with the Chinese government paying up to 50% of the purchase price of domestically-produced EV cars. Lower-end electric vehicles have dominated  and  Tesla   which is subject to 25% import taxes  has largely been priced out of the market. In 2016    [TGT] had just a 3% share of the electric vehicle market in China.
  [TGT]  âs lackluster performance in China is a striking contrast to other global automakers. As in the West  cars are a status symbol in China  and consumers prefer prestigious global brands. Foreign cars claim a 60% market share in China  with foreign brands claiming seven of the top eight spots for cars sold in 2016. Premium brands have done particularly well in China.
Audi  BMW  Mercedes and Porsche all sell between a quarter to a third of their total global sales in China -- a 10% increase on average in just the past five years. In addition  Volkswagen now sells half of its global volume in China. The experiences of other foreign car brands suggest that   [TGT] should fare well in China if   [TGT]   can reduce production costs and vehicle pricing in line with the local market.
It is within this context that   [TGT] needs China more than China needs   [TGT]  . Chinaâs electric vehicle market will grow with or without   [TGT]  . But Teslaâs deal with the Shanghai government is both timely and essential. As the electric vehicle market takes off in China    [TGT] must do well in this vital market to maintain global leadership. Building volume in China is required to reduce production costs and pricing in the global as well as local market. Ultimately  as we are seeing in other industries    [TGT] may find that technology talent in China will also prove vital to maintain   [TGT]   position as a leading innovator globally.