How Tesla assists Chinese businesses in competing with the US
Tesla Is a Catfish in China, and It Transforms Automobile Manufacturers Into Sharks
Tuesday, November 30, 2021 | Chimniii Desk
Key Highlights
- Liu Siong Song created equipment 42 years ago to assist industries in producing low-cost toys and watches.
- It has provided Mr. Musk's company with low-cost land, financing, tax breaks, and other incentives.
- It even permitted Tesla to operate its own factory in China without the assistance of a local partner, a first for a foreign manufacturer in the country.
- They can fabricate the rear body of a car in a single piece, reducing the number of individual components and costs.
- Along with Tesla, LK will deliver similar big casting equipment to six Chinese companies by early 2022, Mr. Liu said, as more automakers adopt Tesla's manufacturing process.
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The electric vehicle manufacturer is assisting Chinese companies in becoming global participants in an expanding industry, posing a competitive threat to established competitors.
Liu Siong Song created equipment 42 years ago to assist industries in producing low-cost toys and watches. Then he produced them for motorbike manufacturers.
Now, he assists Tesla in "making full-size cars in the same way that toy cars are manufactured," as Elon Musk put it.
Mr. Liu, 69, has come full circle in some ways, but he may also have a role to play in the future of driving. His company is one of the new Chinese manufacturers battling fiercely and competently in the emerging electric vehicle sector against established competitors in the United States, Japan, and Europe.
Electric vehicles have the potential to reshape the automotive industry — and, by implication, employment, technology, and geopolitical power. Consider how names like General Motors and Volkswagen have lent economic heft and international legitimacy to the United States and Germany.
China is on the verge of becoming a big player in electric vehicles, and Tesla and a host of Chinese electric vehicle start-ups are assisting its companies in becoming even more competitive. Tesla's massive Shanghai facility collaborates with local vendors to manufacture increasingly complex components that enable the company to compete head-to-head with Western and Japanese auto suppliers.
Tesla's manufacturing process has "put tremendous pressure on established automakers," according to Mr. Liu. "They have all recognised the gravity of the situation and are switching to alternative fuel cars."
Electric vehicles are critical to the Biden administration's effort to promote sustainable energy and reintroduce manufacturing to the United States. However, similar to what Apple did with devices, Tesla is strengthening connections with China in order to gain access to the country's adept manufacturing supply chain and sizable market of automobile customers.
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Elon Musk at the opening ceremony for Tesla China in Shanghai last year. The Chinese government has embraced Tesla, offering it cheap land, loans, tax benefits and subsidies.
Aly Song/Reuters
"China is catching up to competitors in the automobile race by switching lanes," said Patrick Cheng, CEO of NavInfo, a Beijing-based mapping and autonomous driving technology company. "Previously, the race was limited to internal combustion engine cars. Now it's the turn of the electric vehicles."
The term "overtaking" is frequently used in the Chinese automobile business. Many of its executives and engineers believe that the transition to new energy vehicles presents a similar opportunity to that presented by mobile internet in the previous decade, when Chinese companies created powerful platforms such as the mobile messaging app WeChat and the short video app TikTok.
That is why the Chinese government has enthusiastically embraced Tesla. It has provided Mr. Musk's company with low-cost land, financing, tax breaks, and other incentives. It even permitted Tesla to operate its own factory in China without the assistance of a local partner, a first for a foreign manufacturer in the country.
Beijing is pursuing what the business sector refers to as the catfish effect: throwing an aggressive fish into a pool to make the established inhabitants work harder to swim.
The strategy has benefited both parties. Tesla's Shanghai factory, which opened a year ago in 2019, has surpassed the company's Fremont, Calif., plant in terms of production, Mr. Musk said in October at the company's annual shareholders meeting.
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Tesla’s Shanghai factory, built in 2019, has surpassed its Fremont, Calif., plant in production.
Aly Song/Reuters
The factory, dubbed Giga Shanghai, is "the best quality, the lowest cost, and also the least drama," he explained.
It's also a lucrative market for Chinese suppliers. Tesla reported that in the fourth quarter of 2020, its Shanghai facility purchased 86 percent of outsourced Model 3 and Model Y components from within China, compared to 73 percent for Tesla vehicles manufactured in California.
Tesla's stock price has more than doubled in the last year as the business's manufacturing capacity has expanded, valuing the company at approximately $1 trillion. Its China approach played a role, according to James Li, a Beijing-based analyst who follows machinery stocks.
“If Tesla didn’t build a factory in China, will its share prices rise so much? Will its earnings grow significantly?" he inquired. "Not always."
Chinese suppliers to Tesla and other electric vehicle manufacturers have also been stellar performers. The share price of Mr. Liu's publicly traded company, LK Group, has increased nearly ninefold this year.
In 2019, Tesla placed an order with LK for what it described as the world's largest casting machines. Mr. Musk described the machines as about the size of a small house. They can fabricate the rear body of a car in a single piece, reducing the number of individual components and costs.
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Mr. Liu stated that LK collaborated with Tesla on the machine for over a year.
"Every now and then, they'd ask if it was possible to do this or that," he explained. "With each version they made, we had to update our machine as well."
Mr. Liu grew up enthralled by automobiles. He began disassembling used cars and reassembling them in his father's auto shop after being born in Indonesia to a Chinese family. He moved to China in 1966 to pursue school, only to find himself living among the Cultural Revolution's upheaval. He immigrated to Hong Kong in 1972 and founded a machinery company seven years later to serve toymakers and watchmakers.
Since then, he has ridden his way up the Chinese production chain. He first built machines for motorcycle factories, then for smartphone factories, and last for automobile companies. In 2008, during the height of the global financial crisis, he made two strategic moves with two near-bankrupt companies: He became a supplier of equipment to General Motors and acquired Idra, an Italian manufacturer of casting equipment, for approximately $5 million.
Along with Tesla, LK will deliver similar big casting equipment to six Chinese companies by early 2022, Mr. Liu said, as more automakers adopt Tesla's manufacturing process.
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A gigapress made by LK Group in Ningbo, China, makes components for electric vehicles. Tesla commissioned what it called the world’s largest casting machines from LK in 2019.
LK Group
He claimed Tesla's goal of producing 20 million cars per year was ambitious but "not unachievable" because the production process has been streamlined. In 2020, General Motors will sell 6.8 million automobiles, whereas Tesla will deliver half a million.
By revolutionising the automobile manufacturing process, Tesla has the potential to do for Chinese electric vehicle manufacturers what Apple did for the country's smartphone industry. Numerous Chinese suppliers to the iPhone began collaborating with domestic firms, assisting them in developing better phones. Huawei, Xiaomi, and Vivo smartphones have gained popularity in Europe, India, Southeast Asia, and Africa, but not in the United States.
Automobiles will be more difficult to operate. Tesla develops a significant amount of manufacturing technology on its own, which means Chinese firms may have a difficult time imitating Tesla by collaborating with its suppliers.
"We built the machine that built the machine that built the machine," Mr. Musk said last year during an investor call. "We'd aim to reduce our reliance on outsourcing."
Generally, Chinese electric vehicle manufacturers and suppliers require foreign-made electronics and other know-how. The Chinese auto industry is the world's largest, producing over 25 million vehicles per year, yet the most popular brands are Toyota and Chevrolet, while domestic companies have yet to gain traction abroad.
Additionally, Tesla's cordial relationship with the Chinese authorities may deteriorate. Mr. Musk may face more pressure to share additional manufacturing secrets with Chinese suppliers, and he may be forced to comply if he wishes to remain competitive.
This year, Tesla has faced some reputational and regulatory issues in the country. Mr. Musk has been actively healing the relationship by praising China.
When the Chinese Communist Party celebrated its centennial anniversary in July, Mr. Musk wrote on Twitter, "China's economic growth is genuinely incredible, particularly in infrastructure!" I invite people to come see for themselves."
Then, in a taped video at a meeting held by China's internet regulator in September, Mr. Musk referred to China as a "world leader in digitalization." Mr. Musk complimented Chinese automakers as the "most competitive in the world" in another prerecorded video for another conference earlier that month.
Despite its advancements, China still has a long way to go. LK expects to deploy similar casting machines to a number of Chinese enterprises during the next two years. However, some of those firms are having difficulty finding automotive designers with the calibre and talent that Tesla possesses. LK cannot provide the machines without the designs.
"A number of Chinese automakers have expressed interest in producing the machines, but the majority are still in the design phase," Mr. Liu explained. "In China, we have a designer shortage."
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