(Bloomberg Gadfly) -- The world's biggest champion of clean-energy vehicles has opened its arms to embattled electric-car maker Tesla Inc. Or so it seems.
Beijing is removing caps on foreign ownership of automaker ventures, widening access to its critically important, high-margin car market. The limits will be rescinded over five years, with restrictions on electric cars to go this year.
At first blush, Tesla looks like an obvious winner. Unlike the U.S., China has gone whole-hog on green cars, using a carrot-and-stick policy approach. Already the world's largest electric-car market, the nation has ambitions to have 7 million such vehicles on the road by 2025.
So far, Tesla's sales in China -- an average of 800 to 1,000 units a month -- are all imports subject to a 25 percent tariff. Despite accounting for about a fifth of Tesla's revenue or around $2 billion, China merited few mentions in Chief Executive Officer Elon Musk's earnings calls until recently. Since January last year, the U.S. company has exported around 18,000 cars to China, according to Bloomberg Intelligence data.
About a year ago, Musk met with Chinese officials to talk about a production facility; they couldn't agree on ownership structure. Technology-sharing and protection of intellectual property have been key issues for companies such as Tesla when setting up ventures in China. That barrier's now been lifted: With the removal of ownership caps, the company no longer has to partner with a Chinese carmaker.
But local partnerships come with their perks. Most important is money, in the form of subsidies -- something Musk's company could use. Joint ventures mean a carmaker can get included on subsidy lists, with its vehicles eligible for fleet purchases. Earlier this year, central and provincial governments extended subsidies to 50,000 yuan ($7,953) for electric cars that can go longer distances and have higher-energy-density batteries.
BAIC Motor Corp. and Geely Automobile Holdings Ltd. are among firms that produce vehicles meeting these requirements. As Musk has found in several other markets, selling his sleek electric cars is a tough business without subsidies. In Hong Kong, Tesla sales tanked after the government removed a sales incentive.
China's new-energy policy also encourages players to cooperate. The government has set up a credit system that effectively forces all automakers to produce some green vehicles by next year. The credits are easier to accumulate with partners. That's encouraged local carmakers to make around 60,000 alternative-fuel passenger vehicles a month. So important are these new-energy vehicle credits that they'll probably determine global carmakers' bargaining power in their local ventures when the time comes.
Surveys show that an increasing number of Chinese consumers want to buy electric cars. A BAIC-made EU300 or a Geely Dorsett may not have the hyped-up cachet of a Tesla, but policies make them affordable.
Local manufacturing isn't Tesla's only challenge. Its mass-market Model 3 was supposed to be a game-changer for China sales, but it can't seem to get the production right. A Tesla factory in China would likely produce only Model 3s and "probably" a Model Y targeted at the local market, Musk said in the third quarter. That now seems a low-probability event. Adding to its woes, China's quality regulator said earlier this month that Tesla will start recalling almost 9,000 Model S cars to replace a bolt on the steering box.
Sure, there's always the off-chance that Tesla will find relief by aligning with Beijing's ambitions. Take Hainan, the tropical island just visited by President Xi Jinping. After his departure, China said it plans to accelerate the use of alternative-energy cars, phasing out sales of fossil-fuel vehicles and turning the province into a free-trade port. Still, random possibilities aren't something investors can count on.
Share prices of global automakers -- which draw 15 percent to 40 percent of sales from China -- reinforce the impression that there's less to Tuesday's announcement than meets the eye. Most barely budged on the news.
As good as this looks, neither Tesla nor Musk are quite ready for China.
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