Come On, China. Tesla's Just a Shiny Object

(Bloomberg Opinion) -- China wants Tesla Inc. – badly.

And Elon Musk desperately needs capital. Amid trade tensions with the U.S., Beijing is now giving the Tesla founder exactly what he wants. There will be strings attached.

A group of state-backed banks have extended up to 3.5 billion yuan ($521 million) of loans to the company that mature next year, according to a regulatory filing. Tesla fanboys rejoiced, pushing the stock up more than 2 percent. The money from the loan can only be used for its Shanghai gigafactory.

Come On, China. Tesla's Just a Shiny Object

The loan’s terms are as loose as it gets: The debt is non-recourse to Tesla, meaning there’s nothing to worry about if the company can’t repay. In theory, the government could seize the collateral, but it can’t ask Tesla to pony up the cash. Tesla can even draw on the loan in dollars. 

What’s more, Beijing has extended loans to the electric-car maker at a subsidized rate: 90 percent of the one-year rate published by the central bank – 4.35 percent. Meanwhile, market rates for private companies with cash-flow challenges continue to be far higher, if financing is accessible at all. Tesla will also enjoy subsidized rates for land in the Shanghai Lingang industrial zone

In July last year, Tesla signed two deals with the Shanghai government – one to build a high-end factory with an annual capacity of 500,000 electric cars, and another investment agreement to set up a development and innovation center. The latter intends to “promote commercialisation of technological innovation results,” according to a Shanghai Lingang bond prospectus, and the growth of a “high-end manufacturing industry.” For all the free money coming Tesla’s way, Musk may want to consider whether his sacrosanct technology is at risk. 

Beijing isn't as generous at home, though. Take Nio Inc. The latest, hyped-up Chinese Tesla challenger is struggling to get cash and make money. The New-York listed company doesn't make its own cars and recently canned plans to build a factory. It has run cash-flow negative and is expected to stay that way for at least two more years, as we’ve written. Yet Nio continues to sink cash into stock-based compensation, research and development and capex.

Given its cash burn rate, Nio will have to borrow more, as I’ve noted. That doesn’t sit well with its much-touted asset-light model. When the company’s total debt levels exceed the total assets it can use as collateral, funding costs may rise significantly, according to a Goldman Sachs Group Inc. report.

Come On, China. Tesla's Just a Shiny Object

Between September and December, Nio’s debt more than doubled to 3.2 billion yuan, closing in on its 4.8 billion yuan of fixed assets (which are typically used as collateral). Yields on the company’s $750 million of convertible debt due 2024 have shot up to more than 7 percent, from a low of less than 1 percent in late February. Competition is rising, and the company could use a little help from Beijing. But it doesn’t look like that’ll come anytime soon – or cheaply.

Come On, China. Tesla's Just a Shiny Object

Looks like Elon Musk has China where he wants it. He should be careful what he wished for.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

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