China represents the world’s second-largest economy and a major high-growth market for investors. Unfortunately, the Chinese government has made the country a tough nut to crack for many American companies. But potential changes to China’s policies on electric vehicles may soon open up the flood gates for Tesla Inc (Nasdaq: TSLA).
Under the current Chinese policy, which is intended to support domestic electric vehicle manufacturers, foreign vehicle makers must form joint ventures with Chinese manufacturers in order to operate within China. However, the government has recently been discussing a plan to eliminate the joint venture requirement, and allow foreign automakers to run wholly-owned businesses within China.
Bloomberg reports the new plan has not yet been finalized, but could be in place as soon as 2018.
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Several foreign auto manufacturers have already been weighing their options in China under the current policy. Ford Motor Co. ( F) has been discussing a potential joint venture with China’s Anhui Zotye Automobile Co. Volkswagen AG has already finalized an electric vehicle partnership with China’s Anhui Jianghuai Automobile Group Corp.
In addition to its size and growth potential, the Chinese market may be even more appealing to foreign electric vehicle makers thanks to a government push to phase out fossil fuel automobile production completely. Earlier this month, China announced it is working on a plan to end production of internal combustion vehicles all together, but it has not yet announced a timetable for that initiative.
According to Piper Jaffray analyst Alexander Potter, no automaker is better positioned to benefit from elimination of China’s so-called “50/50 rule” than Tesla. Potter says Tesla’s high-end electric vehicle offerings would target a different market than the low-end domestic electric vehicle producers in China.
“We find most of China’s EVs are chintzy in comparison to Tesla’s products … and realistically Tesla’s most capable global peers are probably years away from releasing locally-built luxury EVs,” Potter says.
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In fact, if Tesla chooses to open up shop in China, he says the company’s biggest competition out of the gate would likely be luxury gas-powered vehicle models rather than Chinese-produced electric vehicles. Of course, that competition would disappear in time as China phases out gas-powered cars.
“China could eventually be Tesla’s biggest source of revenue,” Potter says.
Piper Jaffray maintains an “overweight” rating and $386 price target for Tesla stock.
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Tesla May Get the Green Light in China originally appeared on usnews.com
