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Musk's Chinese Trip May Ease Trade Tensions, But Will It Boost Tesla?

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Musk's Chinese Trip May Ease Trade Tensions, But Will It Boost Tesla?
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What’s good for Tesla Inc (NASDAQ: TSLA) may be good for Sino-American relations. But even if a visit this week to China by the American electric car maker’s quirky CEO Elon Musk smooths tensions between the two nations, the question remains: will it be enough to significantly boost Tesla’s profits?

Musk flew to Beijing this week to meet with Chinese Premier Li Keqiang after attending a groundbreaking for Tesla’s new $5-billion factory on the outskirts of Shanghai.

The plant is clearly aimed at helping Tesla navigate the trade spat between the U.S. and China, avoiding higher tariffs by making the cars there.

Morgan Stanley's 'Restrained' View On Tesla's China Opportunity

Morgan Stanley analyst Adam Jonas said in a Thursday note that Chinese production could boost Tesla sales in the Chinese market — and possibly even give Musk some power in negotiations for better import and sale terms for Tesla EVs in the interim while the plant is being built.

But, Jonas said, Morgan Stanley isn’t convinced Musk’s actions will be enough for a big boost to the Tesla bottom line.

“Our estimates for Tesla profitability in 2019 remain materially below consensus … in part because of our more restrained view on Tesla’s ability to tap into the Chinese market,” the analyst said. 

Morgan Stanley maintained an Equal-weight rating on Tesla with a $291 price target. 

'EV Diplomacy'

Much of the press surrounding Musk’s trip and Tesla’s new plant has raised the prospect of Musk helping to smooth over some of the broader edges in the Sino-American trade relationship where trade diplomats have seemingly been ineffective. 

And China's leadership may agree, according to the South China Morning Post.

The paper reported that Li said he hopes Tesla can “get a firm foothold and expand the market,” and that the car maker could be a “participant in China’s opening up and a promoter of stable China-U.S. relations.”

Li even reportedly offered Musk permanent residency in China.

Morgan Stanley's Jonas asked whether Musk's "EV diplomacy" could represent the kind of U.S. corporate leadership that could trigger an improvement in trade relations — though he didn't give an answer. 

Tesla’s investment in its new plant is the largest foreign investment in Shanghai, according to a Chinese government statement released earlier this month. The same document said Tesla could eventually make up to 500,000 cars annually there — or about five times what it produces in the United States. Tesla officials have said they want to begin production at the plant by the end of the year.

In related news, Reuters reported Thursday that half of a $300-billion surge in spending on electric vehicle technology planned by carmakers over the next decade or so will be aimed at China and led by Volkswagen Group, which plans on putting about $90 billion into EVs and said much of its future is tied to the Chinese market.

Tesla shares were trading up 0.76 percent at $341.10 at the time of publication Thursday. 

Related Links: 

What China's Proposed 50% Cut To Car Purchase Tax Could Mean For Automakers

Elon Musk Will Resign As Tesla Chairman, Remain CEO In Settlement With SEC

Photo courtesy of Tesla. 

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