For a start, think through before reading this post. Elon Musk has been as Person of the Year - 2021, by TIME magazine, and his company Tesla has been rallying around a $1 trillion market cap, reaching the valuation for the first time in October this year. Add to this; Musk is also the richest person on the planet with a net worth of more than $250 billion.

From Twitter and TIME Magazine:

Time Magazine describes Musk as:

This is the man who aspires to save our planet and get us a new one to inhabit: clown, genius, edgelord, visionary, industrialist, showman, cad; a madcap hybrid of Thomas Edison, P.T. Barnum, Andrew Carnegie, and Watchmen’s Doctor Manhattan, the brooding, blue-skinned man-god who invents electric cars and moves to Mars.

....The company’s expansion in China required cozying up to its repressive autocrats.

The toll his hard-driving style takes on staff is legendary. Former associates have described Musk as petty, cruel, and petulant, particularly when frustrated or challenged.

One must note the point mentioned about him cozying with China and its repressive autocrats. Musk has been supporting China's ruling Communist Party. His tweets on Twitter and China's version of Twitter - Weibo make this evident. However, his persona towards the US or its government contrasts this.

What exists between Tesla and China is a synergy that has immensely benefitted both since 2018.

Let's digress a bit for a while. If one has seen Frank Capra's movie It's a Wonderful Life; one can remember the story of an angel sent from the heavens to help a frustrated business person. The angel helps the person by showing him how life would have transpired if he had never existed. James Stewart was a genius actor in the movie. We can admire his acting further. However, let's not digress from digress! I wanted to pick a narrative similar to the movie's to go further with this post.

China has been keen to redefine itself from being just a manufacturing hub to also being an innovation and industrial epicenter (it already holds an edge in manufacturing and the number of trained labor). The country started with a well-planned course in 2018 when the country's premier decided to ease the path forward for Tesla and made it part of his plan to make the country a step ahead in the automobile sector. China saw that the automobile sector is going through a significant transition with the influx of advancements concerning artificial intelligence, sensors, and semiconductors. Add to this; automobiles are moving from IC engines to electric motors. The country was ready to bend the rules to allow foreign companies sole ownership of automobile ventures and push the innovation envelope ahead. The government of China has a pattern of inviting foreign companies that bring in the required expertise and innovation to help the local suppliers, who eventually scale up to grow to the level of being competitors to the very same foreign companies that taught them. The same is perhaps true with Tesla.

One doesn't have to struggle to find another example for this pattern. Look at how Apple has a history with China. The company relies heavily on the country both for product manufacturing and sales. Apple brought along necessary expertise and innovation to find synergies with China's ability to provide labor and manufacturing scale. The company had to train the local suppliers and bring them to speed to match the required quality of the end products. Training the local suppliers was necessary to optimize the manufacturing process and costs. This optimization has worked wonders for Apple. The government of China also pushed the company to improve on its commitment to source locally continuously. The country benefitted from these things as local suppliers who Apple trained have become suppliers to its competitors. These competitors are now significant players on the world's stage in the space of mobile computing. Apple enjoys a market share of 11 percent in China. However, local players such as Xiaomi and Huawei have taken up a significant chunk of the market.

China understands that holding the right cards plays to its advantage. At the start of the millennium, it was about becoming a manufacturing hub, and now it is about being an innovation and industrial epicenter unlike any other in the world. To this end, it invites and makes foreign companies with the right or best expertise part of its planning and provides them with the incentives (cheap land, subsidies, tax benefits, and others) to create an ecosystem that nurtures and builds local innovation. Upon reaching a self-sustainable mark, this ecosystem of suppliers or companies branches outside to be disruptive.

Companies such as Apple and Tesla help create a market and instill a sense of stability that benefits the local players. These local players start small, targetting the lower rungs of the market and slowly reaching the top (because the incumbents are left unaware of their progress, or rather, the incumbents dare to ignore these players entirely until these players become noticeable). And then essentially lead the market or sometimes out-innovate the players such as Apple. China effectively attempts to find a new synergy with the foreign players at this stage wherein no doubt these players are allowed or forced to exist within the country, but they would have to abide by new rules. These rules (e.g., regulations defined to keep the data locally, usage restrictions, and others) sometimes indirectly stifle or slow down the growth of foreign players. However, these players continue to operate in China, as they depend on it for sourcing (the country has a well-funded supply chain for electric vehicles) and manufacturing. And Chinese domestic market itself is too big to be ignored. For players such as Tesla, even gaining a smaller double-digit market share would contribute significantly to their revenues. Essentially, China would be hard to ignore and thus a significant dependency. This dependency gives the country an upper hand.

Add to this, having understood the market dynamics, China would also try controlling the suppliers of these foreign players - suppliers that supply critical components such as semiconductor chips and batteries.

From The New York Times:

China makes 70 to 80 percent of the world’s battery chemicals, battery anodes and battery cells. China similarly controls most of the world’s output of high-strength magnets for electric motors, as well as the assembly of those magnets into motors.

I apologize for going away from the narrative that I mentioned earlier here. Let's come back to it now. Hypothetically speaking, imagine China without players such as Apple and Tesla to help it create the local ecosystem supporting its plan of being an innovation epicenter. And also, imagine Tesla and Apple without China to help them with the manufacturing scale, sourcing, and the market that sustains their revenues significantly.

China without Tesla

China started investing in the electric vehicles (EV) space fourteen years back, anticipating a global shift. As a result, the country has built a sustainable and well-funded supply chain for the sector. In addition, China has set joint ventures between multinational companies and local players, eventually forcing them to transfer their expertise and technologies to the local players using regulations. However, despite all these efforts by the government, the Chinese EV market was sluggish, and the performance of the local players was disappointing. With its enviable brand recognition and high-tech expertise, Tesla provided the required impetus and confidence to the market. When Tesla came to China, it promised the government to train the local manufacturers or suppliers and source most of its parts locally.

From WSJ:

Tesla engineers worked with Chinese battery maker Contemporary Amperex Technology Co. Ltd. , known as CATL, to tailor products to Tesla’s needs. A 2020 supply deal with Tesla affirmed the company’s place as a top-tier battery maker.

A supplier of housings for components and hydraulic systems relies on Tesla for roughly half its business. Ningbo Xusheng Auto Technology Co. said in its 2020 annual report that through its cooperation with Tesla, it has “accumulated technologies relating to the design, R&D and production of electric-vehicle parts,” helping it “occupy a top position in the electric-vehicle parts industry.” Ningbo’s 2020 revenue tripled its 2016 level.

So, to say that without Tesla, the Chinese EV market would have continued to be sluggish wouldn't be wrong. Local manufacturers or suppliers (e.g., LK Group) would not have had the required expertise to scale up and innovate to match up with their global counterparts elsewhere. This lack of knowledge and capabilities of the local manufacturers would have translated into lower confidence in the EV sector in the country. Upstarts such as Nio, Li Auto, and Xpeng would have struggled to stay afloat, receiving no funding for their operations or sustainability. These players would have continued to produce less than reliable EVs and eventually perished as customers wouldn't be keen to buy their vehicles. Replicating Tesla's manufacturing technology is challenging as the company makes its technology; however, the local players could benefit from the supply chain advancements. Essentially, one can say that Tesla revived the EV market in China.

Tesla without China

Today, Tesla manufactures half of its vehicles in China, doing this at a lower cost. The company's Shanghai factory is reaching its production capacity limit of 450,000 EVs. It is to receive an equipment upgrade in some time. The company has been able to reap the benefits of training the local suppliers, who have been able to scale up and align with the company's quality and scale requirements. As a result, today, Shanghai's factory manufactures more vehicles than the company's factory in California. In addition, the company has met global demands for its vehicles because of China.

Apart from the supply chain, manufacturing, and cost benefits (because of more than 85 percent local sourcing) in China, Tesla has also benefited from the Chinese domestic market's demand for its EVs. As a result, more than 25 percent of its global revenue comes from China, making China its second-largest market after the US.

These benefits wouldn't come Tesla's way without it being part of China's plan. How Musk and his company will remain a critical and strategic part of China's plan for its EV market will decide Tesla's growth prospects.

Add to this, with literally every country bringing in regulations to cut down on carbon footprint, demand for EVs will grow. Tesla will also have to scale up its manufacturing to meet the global demands, and without China, it may find this challenging. On the other hand, without China, Tesla's market cap would not have rallied around $1 trillion, and perhaps Musk wouldn't have been the wealthiest person too.