How Tesla is helping China’s companies compete with the US

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Forty-two years ago, Liu Siong Song built machines to help factories make cheap toys and watches. Then he made them for motorcycle companies.

Now he’s helping Tesla in the words by Elon Musk: “Make full-size cars the same as toy cars.”

Mr. Liu, 69, may have closed himself up in some ways, but he could also play a role in the future of driving. His company is one of the emerging Chinese manufacturers that competes aggressively and competently with traditional players in the US, Japan and Europe in the emerging electric car industry.

Electric cars could stir up the auto industry – and with it jobs, technology and geopolitical influence. Think how names like General Motors and Volkswagen gave the United States and Germany economic weight and international credibility.

China is on the verge of becoming a major player in electric cars, and Tesla and a number of Chinese newcomers to electric vehicles are helping its companies become even more competitive. Tesla’s huge Shanghai factory works with local suppliers to produce increasingly sophisticated components that help them compete with Western and Japanese auto suppliers.

The way Tesla makes cars has “put a lot of pressure on traditional automakers,” Liu said. “You have all recognized how serious the situation is and are switching to vehicles with new energy.”

Electric vehicles are central to the Biden government’s drive to clean energy and revitalize American manufacturing. But like Apple with gadgets, Tesla is building stronger relationships with China to get closer to both its nifty manufacturing supply chain and the vast market for car buyers.

“China is overtaking its competitors by changing lanes in car racing,” said Patrick Cheng, CEO of NavInfo, a map and autonomous driving company in Beijing. “In the past, races were about vehicles with internal combustion engines. Now it’s the electric cars. “

The word “overtaking” is often heard in the Chinese auto industry. Many of their executives and engineers believe that the transition to new energy vehicles presents an opportunity similar to that of the mobile internet in the last decade, when Chinese companies created powerful platforms like the WeChat mobile messaging app and the TikTok short video app.

That’s why the Chinese government has embraced Tesla with open arms. It has offered cheap land, loans, tax breaks, and subsidies to Mr. Musk’s company. It even enabled Tesla to operate its own plant without a local partner, a first for a foreign automaker in China.

Beijing is looking for what the business world calls the catfish effect: toss an aggressive fish into a pool to make established residents swim harder.

The approach worked for both sides. Tesla’s Shanghai factory, built within a year in 2019, has surpassed its Fremont, California factory in production, Musk said at the company’s general meeting in October.

Giga Shanghai, as the factory is called, is “the best quality, the lowest cost and also the least drama,” he said.

It’s also big business for Chinese suppliers. Tesla said its Shanghai factory purchased 86 percent of the outsourced components of the Model 3 and Model Y within China in the fourth quarter of 2020, compared with 73 percent for Tesla cars manufactured at its California factory.

Tesla’s share price more than doubled over the past year as its manufacturing capacity grew and the company is valued at around $ 1 trillion. His China strategy played a role, said James Li, an analyst who tracks machine stocks in Beijing.

“If Tesla didn’t build a factory in China, will share prices rise that much? Will the result improve that much? ”He said. “Not necessarily.”

Shares in Chinese suppliers to Tesla and other electric vehicle manufacturers have also become star performers. The share price of the publicly traded arm of Mr. Liu’s casting machine manufacturer, the LK Group, has risen nine times in value this year.

In 2019, Tesla ordered the world’s largest casting machines from LK. The machines, which Mr. Musk described as about the size of a small house, can make the rear body of a car one piece and reduce the number of individual components and reduce costs.

Mr. Liu said LK worked side-by-side with Tesla to make the machine for over a year.

“Every now and then they would ask us if it was possible to do this or that,” he said. “With every revision, we also had to make changes to our machine.”

Mr. Liu grew up fascinated by cars. Born in Indonesia to a Chinese family, he began disassembling used cars and then reassembling them with parts in his father’s auto repair shop. In 1966 he emigrated to China to go to school and finally to live in the midst of the chaos of the Cultural Revolution. In 1972 he emigrated to Hong Kong and seven years later founded a machine company to supply toy manufacturers and watchmakers.

Since then he has been riding up the Chinese manufacturing chain. He started building machines for motorcycle factories, then smartphone factories, then car factories. At the height of the global financial crisis in 2008, he took two strategic steps with two companies on the verge of bankruptcy: he became an equipment supplier to General Motors and he acquired Idra, an Italian manufacturer of foundry equipment, for about $ 5 million.

In addition to Tesla, LK will be supplying similar giant casting machines to six Chinese companies by early 2022 as more automakers adopt Tesla’s way of making cars, Liu said.

He said Tesla’s goal of producing 20 million cars a year is ambitious but “not unattainable” because it has simplified the manufacturing process. GM sold 6.8 million vehicles in 2020 while Tesla delivered half a million cars.

By changing the way cars are made, Tesla could do for Chinese electric vehicle makers what Apple did for the country’s smartphone industry. Many Chinese iPhone vendors started working with local brands to help them make better phones. Now Huawei, Xiaomi, and Vivo phones are popular in Europe, India, Southeast Asia, and Africa, if not the United States.

Cars are getting more difficult. Tesla builds many manufacturing technologies in-house, so Chinese brands may have a hard time copying Tesla by working with its suppliers.

“We made the machine that made the machine that made the machine,” Musk said on a call to investors last year. “We want to outsource less.”

In general, Chinese electric car manufacturers and their suppliers need overseas-made chips and other know-how. The Chinese auto industry is the largest in the world, with around 25 million cars a year, but the most popular are brands like Toyota and Chevrolet, and local brands have not yet caught on overseas.

And Tesla’s warm relationship with the Chinese government could turn sour. Mr Musk could come under pressure to share even more manufacturing knowledge with Chinese suppliers, and he would have no choice but to do so if he hoped to stay in the market.

Tesla has seen some reputational and regulatory challenges in the country this year. Mr. Musk was busy improving the relationship by speaking positively about China.

When the Chinese Communist Party celebrated its 100th birthday in July called on Twitter: “The economic prosperity that China has achieved is truly amazing, especially in terms of infrastructure! I encourage people to visit and see for themselves. “

Then, at a conference hosted by China’s Internet regulator in September, Mr. Musk named China a “global leader in digitization” in a taped video. In another taped video for another conference earlier this month, Mr. Musk praised Chinese automakers as “the most competitive in the world.”

With all of China’s progress, there is still a long way to go. LK hopes to be able to supply many Chinese companies with the same type of casting machines in the next two years. But some of these companies are struggling to find car designers of the kind and talent that Tesla has in abundance. Without the constructions, LK cannot deliver the machines.

“A lot of Chinese automakers are talking to us about building the machines, but the majority of them are still in the development process,” said Mr. Liu. “We have a shortage of designers in China.”



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