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Could China Be The Hero Tesla Needs?

Could China Be The Hero Tesla Needs?

As investors lose patience after production snafus and a massive cash burn, the news from China could be a game-changer for Tesla.

China announced Tuesday that it will ease its strict joint-venture rules on foreign carmakers, which could majorly benefit Tesla (NASDAQ: TSLA) at a time when the Silicon Valley car maker really needs a charge.

Tesla has long-sought to have a wholly-owned factory in China. And last year started negotiations for a factory in the country, but failed to reach an agreement because the government didn’t want Tesla to fully own the facility.

But this new change opens the door for Tesla to have its own factory in the country as early as this year.

The National Development and Reform Commission confirmed that “all ownership restrictions will be lifted” over the next five years, but the restriction for electric vehicle producers will be the first to be lifted.

Under current rules, automakers can only own up to 50% of their Chinese joint venture (JV), preventing companies like GM from barreling into China, eliminating the competition and taking all the profits. Instead, companies have had to team up with a Chinese company to produce its vehicles and split the venture.

But Tesla, unlike GM, is still trying to break into the Chinese market, which could be a larger opportunity for the company than the U.S. market.

Currently, as with any of other carmaker, Tesla faces a 25% import tax when it imports its vehicles into China, making its vehicles expensive enough so as to substantially limit demand. Under the new rules issued this week, Tesla will have the opportunity to not only avoid import taxes by producing their vehicles within China, but will also be able to produce the vehicles in China without a JV partner.

However, going without a partner in China means Tesla will have to fund the entire project itself and Tesla isn’t exactly flush with cash. With negative free-cash flow and a bottom-line deficit, the company may need to raise capital despite CEO Elon Musk’s insistence that Tesla won’t need to.

According to Musk, the company should be cash flow positive and profitable in the second half of 2018 as the production of the mass-market Model 3 is improved and ramps up. However, it isn’t hard to imagine Tesla raising capital if it wants to get into the Chinese market sooner than later, especially considering that the company is expanding its Gigafactory, has plans to release its new Roadster, already has orders for its new semi truck, and is planning to begin production on its new mass market SUV, the Model Y, by the end of 2019.

Still, this rule change in China could be just the spark Tesla needs, even if it means the company has to secure additional funding.

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