19 Nov The Information : Musk Could Prove China’s Ace in Dealing With Trump

Media Source : The Information

Tesla wants approval for its full self driving software, China wants fewer tariffs

By Steve LeVine, Juro Osawa and Rachel Liang

Donald Trump’s election could put Tesla CEO Elon Musk in a tough spot, caught between his support for the president-elect and Trump’s tough stance toward China, Tesla’s second- biggest market. But Musk could instead thrive by proving a valuable bridge between Trump and Chinese leader Xi Jinping.

Here’s why: Tesla’s electric vehicle sales in China have slipped over the past year even as EVs and plug-in hybrids have soared to more than half of new car sales in the country. Tesla’s problem: Its models are outdated and outstripped by zippy, tech-filled competition from Chinese rivals like Byd and Nio.

 The Takeaway

Elon Musk has ties to President-elect Donald Trump and Chinese leaders, which may ease hostilities between the nations.

To get back on track, Tesla desperately needs to update its cars—specifically, equip them with autonomous-driving software, an increasingly decisive feature of EVs in the brutally competitive Chinese market. But to do so, it needs a permit, for which it’s still waiting despite a tentative green light from the country’s second-most-powerful official.

Some analysts think Trump’s victory Tuesday could give Musk leverage with Chinese officials —and accelerate approval of Tesla’s self-driving permit. But Xi may ask for something in return, such as persuading Trump to go easy on new tariffs or to scrap an effective U.S. ban on sales of Chinese EVs.

For Musk, the permit allowing Teslas equipped with Full Self Driving software is an urgent priority. Tesla

had no real rivals for its prior product launches in China. Now it has fallen behind.

Multiple Chinese companies—from EV makers to tech giants to developers of self-driving software—are already using partial or full autonomous driving technology on urban roads. EV makers XPeng, Nio and Li Auto developed and operate advanced driver assistance systems, similar to Tesla’s FSD, which require drivers to keep their eyes on the road and hands on the wheel. Baidu, Momenta, Pony.ai and WeRide operate pilot robotaxi programs in several Chinese cities, using driverless software.

The main battleground in China is for ADAS in mainstream vehicles. Without it, you increasingly can’t compete: More than half of new cars sold in China last year included ADAS, according to Canalys, an industry research firm.

“China is by far the biggest potential market for advanced driver assistance systems. And it’s also the most competitive market,” said Gerhard Steiger, chair of Momenta’s European unit. “We strongly believe that nearly all new cars in China will eventually be equipped with higher levels of driver assistance systems as the cost of mass production comes down.”

A Go-between

If Musk serves as a go-between in U.S.-China relations, it won’t be the first time. In April 2018, during Trump’s first term as president, he imposed a 25% tariff on $50 billion of Chinese imports; China matched the tariffs in retaliation. For the next year, the two countries imposed new tariffs on each other.

Amid the tit-for-tat exchange, the Chinese government granted Tesla permission to make cars in the country without a local partner—the first foreign automaker it allowed to operate alone. The Shanghai government backed the plant with a 50-year land lease, a low-interest $520 million loan and low income taxes for four years.

Xi had multiple reasons to grant Tesla permission. For one, he wanted to light a fire under Chinese automakers, who he hoped would respond to Tesla’s advanced technology and style with competing models.

But it also was a bit of car diplomacy, a sign that Xi wanted to cool the escalating trade war. In June 2019, Trump—meeting face to face with Xi—agreed to impose no new tariffs and Xi said China would buy an unspecified amount of U.S. farm products.

Xi’s move had its intended impact on China’s EV companies: Over the next six years, scores of them launched into a brutal competition to stand out. Byd emerged as China’s leading carmaker, producing dozens of models of EVs and plug-in hybrids. In October, it sold more than 500,000 units in a month for the first time. In the third quarter, Byd’s quarterly revenue surpassed Tesla’s for the first time, too, reaching

$28.2 billion, compared with Tesla’s $25.2 billion.

Tesla’s China sales are falling—3% in the first 10 months of 2024. BYD, meanwhile, has already exceeded its 2023 sales and is on track to sell 33% more cars this year than last.

Tesla’s self-driving problems stem in part from China’s security restrictions. Last year, Chinese authorities banned Teslas from some government office areas, military zones and airports. But there also was the matter that, next to Chinese models, Tesla’s EVs started to look outmoded.

A Meeting With the Premier

In April, Musk made a surprise two-day trip to Beijing to try to lift the effective block on using FSD. In a meeting with China’s premier, Li Qiang, he got preliminary permission to use FSD in a limited pilot program in Shanghai. Musk asked for permission to bring a small fleet of Tesla’s prototype Robotaxis to Shanghai, but it’s not clear whether Li approved that or just the use of FSD in Tesla Models 3 and Y plying Shanghai roads. As a bonus, in a separate meeting, Musk sealed a deal with Chinese tech giant Baidu to use the group’s mapping and navigation systems, considered the best in the country. Musk did not respond to an email.

In June, Tesla said it had received final approval to start the FSD road test, but it is still held up. In a tweet in September, Tesla said it expected to have FSD in its cars on Chinese roads in the first quarter of next year; it wasn’t clear whether the company meant the pilot or cars for customers.

Meanwhile, Tesla’s biggest EV competitors in China, such as BYD and Nio, are equipping their vehicles with ADAS, in addition to driverless pilot programs, while software providers like Momenta are supplying their ADAS to more carmakers.

The question is whether Trump’s election will help Tesla: Analysts expect Musk’s relationship with Trump to smooth over issues like the stuck FSD permit. Chinese authorities, already friendly to Musk, could become even more so now. Musk may also engage in some diplomatic horse trading, using his closeness to Trump.

But Xi, regarded as a sophisticated negotiator by U.S. experts who have dealt with him, could seek to take advantage of Musk’s desire for FSD approval to gain leverage with Trump. One big potential ask is to lift an effective U.S. ban on Chinese EVs, imposed by President Joe Biden.

Trump might be open to that: In recent months, he has repeatedly invited BYD to build its cars in the U.S. He threatened 200% tariffs if it builds them in Mexico and attempts to export them into the U.S. tariff-free under the U.S.-Mexico-Canada Agreement.

Bill Russo, China-based founder of Automobility and Chrysler’s former head in the region, said he expects such diplomacy to take place but is skeptical that Musk will get a large share of the market for autonomous Chinese EVs. “Tesla’s going to get a lane, but it’s going to be a thin lane,” he said. “Fully self- driving vehicles deployed at scale in China—good luck with that.”

Tu Le, managing director of Sino Auto Insights, said he saw more room for give and take between Musk, Xi and Trump. For China, Tesla continues to be a prod to local carmakers to produce EVs with global appeal. Tesla also is the only automaker in China apart from BYD that produces EVs at large scale, helping make China the world leader in EV technology.

“Tesla needs China and China needs Tesla for the foreseeable future,” Le said. “The economy isn’t great. The Chinese government can use Tesla as an example of ‘Look at a successful foreign company doing business here.’”

Steve LeVine is editor of The Electric. Previously, he worked at Axios, Quartz and Medium, and before that The Wall Street Journal and The New York Times. He is the author of The Powerhouse: America, China and the Great Battery War, and is on Twitter @stevelevine

Juro Osawa is a reporter covering tech in Asia, from Alibaba and Tencent to startups. He previously worked for The Wall Street Journal. He is based in Hong Kong and can be found on Twitter at @JuroOsawa.

Rachel Liang is a contributor to The Information.