The China ‘game changer’ that just made Elon Musk billions

Elon Musk’s flying visit to China seems to have had a major pay-off for his spluttering electric vehicle maker. Investors certainly thought so, with Tesla’s shares soaring.

Despite China being Tesla’s second-largest market and the site of its biggest car plant, Tesla has been losing ground in the fierce, price-driven competition with China’s multitude of domestic EV and hybrid vehicle manufacturers.

Elon Musk’s meetings included one with Chinese Premier Li Qiang.Credit: AP

It has been unable to offer its most advanced technology, its Full Self-Driving or FSD technology for semi-autonomous driving, in that market even as an increasing number of Chinese competitors have been rolling out more advanced autonomous technology of their own. Tesla’s market share in China has, according to Bloomberg, dropped from 10.5 per cent a year ago to less than 7 per cent.

The obstacles were China’s concern about data protection – Tesla vehicles were banned from approaching military or government sites – and its lack of access to high-resolution lane-level mapping data.

If the data security obstacle hasn’t yet been cleared, Tesla is now a lot closer to obtaining a clearance after the government-backed China Association of Automobile Manufacturers gave it, along with a number of other EV companies, approval for its data security protocols and practices.

That green light just happened to coincide with Musk’s meeting with Chinese Premier Li Qiang in Beijing at the weekend. In an indication of the weight Musk gave to that meeting, he ditched a planned appointment with Indian Prime Minister Narendra Modi a day before the scheduled visit.

Tesla cleared its second hurdle via an agreement with Chinese tech giant Baidu, which operates the country’s biggest search engine, to gain access to its lane-level navigation software.

Assuming the tentative security clearance is confirmed, Tesla would be able to roll out its FSD system in China, making its vehicles far more competitive against the leading edge of Chinese EV technology. It would also offer a new stream of income, from purchases of the FSD software and subscriptions for it, to offset the impact of the brutal price war within China’s domestic EV market.

With more than 100 EV manufacturers in China operating in a market with weak consumer demand and where the industry’s plants are operating at less than 65 per cent of their capacity, there have been rounds of price reductions from the major manufacturers, Tesla included.

The breakthrough in China, if confirmed, would be a major moment for Tesla, and not just because it might be able to sell more EVs and generate higher-margin income in the country.

China has been a tricky market for Tesla.Credit: Bloomberg

Musk has signalled Tesla is close to rolling out its much-vaunted (and much delayed) robotaxi, with an announced scheduled for early August. While, again, the vehicles will be semi-autonomous, requiring driver supervision, they are expected to incorporate the latest AI-driven software.

AI models require access to massive amounts of data to be trained. Tesla, having sold nearly 2 million EVs in China, has a lot of data stored within the data centre it built in Shanghai three years ago, and would collect more and more valuable data if it could roll out its FSD software.

It has applied to be able to transfer that data out of China to the US so that it can create a big pool of data, and one enriched by the more complex nature of China’s transport mix to train its models.

With China regarding data protection as a national security issue (as is increasingly the case in other jurisdictions) that is a big ask, but one that could, with the $US10 billion ($15 billion) a year Musk has said Tesla will spend on AI, give the company a competitive advantage.

Robin Li, the co-founder and chief executive of Chinese internet giant Baidu.Credit: Bloomberg

If Tesla doesn’t gain approval to transfer the data, there are suggestions that it might pool and process its data within China with Baidu, which has its own fleet of robotaxis. Tesla and Baidu have had a relationship in the past, with Baidu supplying Tesla with mapping data, albeit not at the lane level, since 2020.

For much of this year, Tesla shares have been languishing, with the share price falling by more than 40 per cent since the start of the year before last week’s quarterly results.

The result was, as expected, dreadful – earnings more than halved – but Musk turned the trajectory of the share price around by announcing that, not only was Tesla committed to the launch of its robotaxis, but it planned to add a new cheaper model to its line-up as early as next year, using existing production facilities and EV platforms. It was the latter that got the market excited.

The dash to China and the apparent success of Tesla’s efforts to gain clearance for its FSD technology has had an even bigger impact.

The breakthrough in China, if confirmed, would be a major moment for Tesla and not just because it might be able to sell more EVs and generate higher-margin income in China.

Tesla shares soared more than 15 per cent on the news. Since it’s pre-results low, Tesla’s market capitalisation has jumped $US166.4 billion, to nearly $US619 billion, recovering more than $US37 billion of Musk’s own net worth in the process.

While the breakthroughs in China have been described as game changers for the company, competition in that market is formidable, with rivals that are already operating highly sophisticated semi-autonomous fleets of robotaxis.

Regulators in China don’t seem quite as focused on safety issues as their US and European counterparts (on Friday the US transport safety regulator launched yet another investigation into Tesla’s previous generation of software, its Autopilot driver assistance system), which should make it easier for Tesla to make its FSD packages available quite widely and quickly once a formal clearance is achieved.

FSD pricing has been trending down. Initially, it cost $US15,000, which was then cut to $US12,000 and, quite recently, to $US8000, with a subscription alternative of $US99 a month.

In a market, and not just in China, that is oversupplied and price-driven, it could be that AI-driven software provides the profit margin and competitive advantage, or at least no disadvantage.

Certainly, Musk sees Tesla as far more of a technology company than an auto manufacturer, and says that anyone spending less than Tesla’s planned $US10 billion on AI won’t be able to compete.

It is part of China’s five-year plan, of course, to dominate both AI and the EV sector, and its has been providing massive subsidies and incentives to Chinese companies, including its EV sector, as part of that strategy.

China may see Tesla’s presence within the country as helpful, given the prospect of a data-sharing relationship with Baidu and that Musk has said Tesla, the West’s flag bearer for EVs, is prepared to license its autonomous driving software to third parties.

Whatever the motivation for the apparent clearing of the pathway to enable Tesla to bring its technology to bear on China’s domestic market, the sharemarket, at least, seems convinced that it will help turn around the group’s flagging fortunes and provide a key building block for Musk’s long-held vision of a truly autonomous driving future.

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