Tesla Alone Can’t Fulfill China’s Electric Car Dreams

Beijing’s ability to attract Tesla Inc. was meant to crown its drive to be at the forefront of the global electric car market. But challenges stemming from the pandemic that has shut down much of the economy raise an ominous sign: The Chinese dream of domination may remain just that.

Given coronavirus-related troubles in the supply chain, Elon Musk’s company says it had to downgrade some parts used in its China-made sedans: It installed a lower-quality and slower chip that enables self-driving from what was originally planned to speed up car deliveries to customers. With owners complaining, Beijing said the company should make sure cars produced in China meet promised standards. Separately, in early February, Tesla had to shut down its recently opened Gigafactory 3 in Shanghai as part of a wider government order to stop the spread of the virus. Production restarted shortly afterward.

Tesla’s difficulties aren’t unique; the coronavirus has wreaked havoc across industrial supply chains. But they’re the latest blow to China as it tries to corner the entire electric vehicle ecosystem, from battery materials to control systems to manufacturing. The last thing the government wants is substandard Model 3s rolling on the streets of Shanghai. And if Tesla is having problems sourcing quality parts, even in normal times, then what of other electric-car makers that lack the same level of support from Beijing?

In theory, Tesla can get needed components. As of December, it imported more than 70% of the parts for cars assembled at the Shanghai facility. The company has said it wants to localize its entire supply chain. Tesla has struck deals with a few larger parts suppliers, like battery maker Contemporary Amperex Technology Co., or CATL; Huada Automotive Technology Corp Ltd.; and Shanghai Ligang Joyson Safety Systems Co., a subsidiary of Ningbo Joyson Electronic Corp.

China wasn’t just a big market for Tesla. The country also promised fast production (something Tesla had trouble with in the U.S.) and strong supply chains. Barring the few big companies that Tesla is tying up with, most parts makers are small and medium in size. The outbreak has hit them hardest. Without any visibility on orders from carmakers as the market tanks, their severe cash flow problems will worsen. They won’t be making quality parts any time soon.