In a recent earnings call, Tesla CEO Elon Musk hinted at a plan to announce the location of Tesla Motors' (TSLA, Financial) Gigafactory in China. The U.S.-based manufacturer is considering a car manufacturing and battery production factory under a single roof in China. However, Panasonic (TSE:6752, Financial) -- a partner of Tesla in Gigafactory investments -- is reluctant to make a commitment towards the new Tesla factory just yet. The plans are “not solidified yet,” according to some of Panasonic’s executives.
Panasonic is already a partner in the Nevada Gigafactory, which is expected to produce 35 gigawatt-hours annually by 2020. Panasonic has invested $1.82 billion in the said factory, but further investments would be based on the assessment of the situation, according to one of Panasonics’ executives. Moreover, Panasonic has other options to fall back on, in case Tesla’s financial position deteriorates further. Toyota Motors (TM, Financial) is reportedly expected to become another key partner for Panasonic in the EV battery space. Both the companies hinted at a joint EV battery partnership last year.
In short, Panasonic’s new battery manufacturing investment with Tesla is not a done deal, which is expected to create financing problems for Tesla going forward.
Tesla’s factory ambitions are at risk
Given Panasonic’s cautious investment approach, Tesla's car-assembly and battery-production ambitions under one roof in China might be at risk. Recent earnings were not good for Tesla as the company faces liquidity problems. The company has already offered its Fremont factory as collateral to shore up liquidity. Nonetheless, investment in China would require a lot of capital, as is evident from the possible $5 billion in spending necessary on the Nevada Factory by 2020. Tesla has to keep investing in the Nevada Factory to extend battery production while simultaneously investing in the new Chinese Factory. Panasonic’s reluctance is ominous, as Tesla’s China ambitions would be a no-go without the financial assistance of a partner.
Is China important for Tesla?
In short, yes. Investment in China is critical for Tesla Motors as China is the largest EV market. During the first four months of 2018, EV sales in China grew an astonishing 149% year-over-year. China accounted for half of the EV sales around the globe during the first quarter of 2018. Chinese government is eyeing 2 million EV sales yearly by the end of 2020.
Moreover, the influx of competitors means price wars, and that’s why local manufacturing is of utmost important for Tesla to become relevant in the Chinese EV market. Global automakers including General Motors (GM, Financial), Nissan Motors (TSE:7201) and Volkswagen (VOW, Financial) unveiled several EV models during a motor show in Beijing recently. Moreover, homegrown EV names like BYD Co (OTCPK:BYDDF) and BAIC Motors (OTCPK:BYDDF) are also doing well on the EV front. As a matter of fact, BYD sold the highest number of plug-in electric cars during 2017, thanks to its Chinese roots.
To review, heavy up-front investment requirement and limited wiggle room in terms of pricing is the biggest question mark for Tesla’s China ambition as of now.
Tesla isn’t giving up though
Despite a challenging liquidity situation, Tesla isn’t sitting this one out. Musk, the CEO of Tesla, has made clear his plans about the factory investment in China. The company has reportedly registered a new electric car firm in Shanghai just recently. The new company will focus on electric cars, spare parts and batteries, reports Reuters.
As China is removing the ownership-cap on foreign investors, Tesla is set to be one of the primary international beneficiaries. Setting up a factory in China will allow the company to avoid import tariffs along with keeping 100% control over its technology. However, the question remains, how will Tesla finance its new capital venture given low cash reserves, mounting losses and maturing debt?
Can Tesla afford to build its new factory?
It would certainly need the help of its battery partner Panasonic, which is not thrilled about the slow ramp up of Model 3. Tesla can, however, raise money. The company recently offered its prized Fremont factory as collateral.
Although Musk maintains that the company doesn’t require an additional capital-raise, it’s hard to see Tesla go about its China ambitions without raising capital. Given expensive pricing of its equity, the company can go to equity markets, but Musk’s recent stunt with the analysts on the earnings call might make raising capital from the equity markets difficult. As crazy as it might sound, as a last resort, Tesla can go for an ICO to raise the money from the booming crypto-market.
It's clear that Tesla has a short financing runway as of now; it will require additional capital to support growth. Panasonic’s reluctance comes at a difficult time as Tesla lays its plans for a Chinese Factory. With that said, Tesla has several options for financing including collateralized debt, equity-raise or a last resort ICO.
Despite Musk’s denial, the company will need all the capital it can procure in order for the Chinese expansion to go through. The management should set its priorities straight and try to steer from a going concern perspective, rather than trying to protect its inflated stock price.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.