Will Tesla Be Given The Green Light To Build A WFOE In China?

Elon Musk, co-founder, CEO and Product Architect at Tesla, wishes to make electric cars the regular mode of transport worldwide.

Despite the company’s low-key appearance, Tesla has managed to make the news by establishing a factory in the form of a Wholly Foreign-Owned Enterprise (WFOE) in the Shanghai Free Trade Area. 

The consequences of this are still unclear and numerous news outlets are speculating about the necessity for Tesla to enter into a joint venture partnership with a Chinese automaker to succeed in the Chinese market.

In practice, multinational companies and their business activities can easily form a monopoly on the market, and many countries interrupt the investment behaviors of these companies by setting up obstacles on equity. 

This is especially true of the automobile vehicle manufacturing field, which has a significant impact on the national economy and the citizens' living standards.

For example, Volkswagen, F.I.A.T., Ford and other big names of the industry have been collaborating with local companies to meet Chinese governmental requirements.

Special administrative measures on the Automobile Manufacturing Industry

Circular of the General Office of the State Council on Issuing the Special Administrative Measures (Negative List) for Foreign Investment Access to Pilot Free Trade Zones (2017 Edition)：

"In terms of investment in the manufacturing of finished automobile cars and special-purpose motor vehicles, the shares controlled by the Chinese party shall not be less than 50%, and a foreign company is allowed to establish up to two (including two) joint venture enterprises engaged in the manufacturing of similar finished automobile cars (passenger cars or commercial vehicles) in China. In the case of a merger of another domestic automobile manufacturing enterprise with a Chinese joint venture partner, it is free from such restriction."

Special Administrative Measures (Negative List) for Foreign Investment Access to China (Shanghai) Pilot Free Trade Zone (Revised in 2014)：

1. Investment in the manufacturing of finished automobile cars, special-purpose motor vehicles and agricultural trucks must be subject to joint venture or cooperative operation, and shares controlled by the Chinese party shall not be less than 50%; when a listed joint-stock company specializing in finished automobile cars, special-purpose motor vehicles and agricultural trucks sells its corporate shares, one of its Chinese legal persons shall be a relative shareholder with an amount exceeding the sum of shares held by foreign legal persons; one foreign company is allowed to establish up to two (including two) joint ventures engaged in the manufacturing of similar finished automobile cars (passenger car or commercial vehicle) in China. In the case of a merger of other domestic automobile manufacturing enterprises with the Chinese partner, it is free from such restrictions.
2. Investment in the manufacturing and research and development of automobile embodied electronic integrated systems must be subject to joint venture or cooperative operation.
3. In terms of investment in the energy-based power batteries (energy density ≥ 110 Wh/kg; cycle life ≥ 2,000 times) of new-energy automobiles, shares held by the foreign party shall not be more than 50%.

In accordance with the “Special administrative measures on Automobile Manufacturing Industry”, it is possible for Tesla to establish a WFOE. The WFOE could be a very convenient way to maintain confidentiality and, in addition, to maintain leading knowledge management technologies on the market.

However, if the news is confirmed, Tesla will have to settle a 25% customs duty and other added value taxes. When selling goods onto the Chinese market, one must take into consideration the nature of the free trade zone (it is under the customs’ special supervision, and not a tariff-free zone). When compared to its transportation cost, this is quite a relief. We may estimate that this WFOE will help to reduce costs by 20%.

Yet, we must not lose sight of the many obstacles and challenges foreign companies face in pursuing market status in China. The shareholding restrictions on automobile manufacturing stem from 1994, when China promulgated the first "automobile industry development policy" thus regulating the proportion of joint ventures. Then another two revisions came in 2004 and 2009, issued by the National Development and Reform Commission. These restrictions are still enforced today.

In recent years though, the following statement was removed from the last version of the State Council’s Negative List: “new all-electric battery passenger vehicle manufacturing enterprises must have their own product brands and proprietary intellectual property rights as well as authorized relevant patents for invention.” It has been interpreted by many as a signal that China’s market will open to those who can increase the production of environment – friendly vehicles.

This happens to coincide with the insider information on Tesla’s WFOE gamble. It is reported that the Chinese government has considered changing its negative list to allow foreign companies to expand electric automobile production. This amendment may be enforced as early as next year. The current attitude of the Chinese government is they are cautious with such changes, but still leave some leeway.

After denying the news regarding Tesla’s WFOE in China, the company’s spokesman added: “For foreign investors, especially in high-tech, energy saving and environmental protection, strategic emerging industries and other fields, China has always taken a welcoming attitude.”

For China, currently the world's largest electric automobile market, the growth prospects for electric vehicle manufacturers are bright. Whether or not Tesla will become the world's largest electric vehicle brand remains to be seen. Nevertheless, this much is clear: the electric vehicles have already changed the dynamics of the world we live in.