Has Tesla completed its betting agreement with Shanghai?

Tesla Giga Shanghai

After Tesla has been in China for some time after a significant price cut, it is now starting to be remembered that the previous betting agreement between Tesla and the city of Shanghai may have been a key factor in Tesla's price cut this time.

Looking back at Tesla's betting agreement again, the city of Shanghai offered Tesla very generous terms.

  • Tesla acquired an 860,000 square meter plot of land for about 980 million yuan, about 1/10th of the market price.
  • Chinese financial institutions granted Tesla a $590 million low-interest loan with an annual interest rate of only 3.9%.
  • In 2019, the Shanghai government also provided Tesla with about $85 million in subsidies for the Shanghai plant, including $47 million in cash and $38 million in other grants.

What Tesla needs to accomplish.

  • Pay $340 million in annual taxes to Shanghai starting in 2023, or it must return the land.
  • Tesla to spend $2.07 billion in capital expenditures on the Shanghai plant over the next five years.
  • All parts must be 100% locally produced in China.

At the time Tesla started production of Model 3 in 2019, Tesla's local production rate was only 30%, and by 2022, the number advanced rapidly to 95%, as to why it failed to reach 100%, and China's technical strength in the chip field, AMD's CPU and GPU, Infineon's IGBT, ON Semiconductor's image sensor, etc., still need to be imported, resulting in Tesla's parts have not yet achieved 100% local production. However, Tesla does pull China's electric vehicle industry chain, or the two sides are mutual achievements, with six companies from China in the top ten global power battery installations, and none of the top ten European or American companies.

And the $2.07 billion investment is not difficult, Tesla Shanghai factory total investment up to $7.4 billion, the first phase of investment of 2.33 billion, so the investment target of 2.07 billion yuan, is certainly achievable, the most critical is the tax target. And one of the reasons why Tesla drastically cut prices to boost sales is to complete the 340 million yuan tax payment.

The calculation of corporate income tax is very complicated, it is difficult to simply summarize how much revenue Tesla has to reach in order to achieve such a tax target, but according to the tax amount of SAIC Volkswagen and other car companies, it is not easy to complete this tax target. So what Tesla can do to achieve this tax target is just two things, one is to significantly increase the price of the product to pull up the revenue, and the other is to reduce the price to improve sales, and eventually pull up the total revenue. And Tesla's orders in the last year has been weak growth, excess capacity, it is clear that the price cut has become the only choice for Tesla.

Whether Tesla's price cut is due to the betting agreement, or because of the competitive pressure brought by Chinese car companies, the price cut itself is a good thing for users, to force other car companies to reduce prices and promote the competition of the whole electric car, which is undoubtedly what we want to see.

About Author
John Murphy

John Murphy is the founder of TOPCARS Tesla Aftermarket Accessories, as well as an investor in Tesla and owner of the Model Y. He posts about Tesla news while running the site on a daily basis.

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