A Big Concern For Tesla In China

Aug.31.14 | About: Tesla Motors (TSLA)

Summary

Tesla and China Unicom recently inked a deal for 400 Chinese charging stations.

Tensions between the U.S. and China in tech have been high.

Tesla remains strong but the stance taken by the Chinese is critical.

Shares of Tesla Motors (NASDAQ:TSLA) traded up to an all-time high during the Friday holiday trading session heading into the Labor Day weekend, largely driven by news that the electric car maker had struck a deal with China Unicom (NYSE:CHU), the second largest mobile carrier in China. Terms of the deal may help Tesla establish a stronghold for its vehicles, at a time when the Chinese have become increasingly resistant to U.S. technology companies; it is this resistance that should be of real concern to investors. While the full scope of what the arrangement means for Tesla in the near term is yet unknown, given the massive size of that market, this should be counted as yet another reason to own the stock. Despite the strong performance of Tesla thus far this year, I remain a buyer.

The China Unicom Deal

Bloomberg reported the basic terms of the deal: "Tesla signed an agreement today with China United Network Communications Corp. to build 400 charging points in 120 Chinese cities at China Unicom outlets, Tesla spokeswoman Peggy Yang said today in a phone interview. The two companies will also build 20 supercharging stations that work as much as 16 times faster, she said." With China standing as the world's second largest economy, and a huge center for growth, the news is significant for Tesla's global future.

In related news, the Wall Street Journal reported that China is considering levying a new tax on gasoline, specifically with the focus on driving electric car sales: "China is weighing a new tax on gasoline to fund efforts to make electric cars more palatable to Chinese consumers, according to Wang Chuanfu, chairman of electric-car maker BYD Co." China is no stranger to pollution issues, and with the sheer volume of cars on the road in China, even a small tax could yield significant resources to aid in the development of the electric car market; charging stations are a critical first step.

The positive news in China comes just as Georgia becomes the latest U.S. state to see a suit filed over the direct sales of these vehicles. Earlier this year, New Jersey became the latest state to ban direct sales of Tesla vehicles by prohibiting the company from making sales or providing test drives at its two local locations. Where traditional car manufacturers use dealers to sell cars to consumers, Tesla sales are made over the internet. The dealer networks - which are protected by state laws and powerful lobbies - argue that direct sales are anti-competitive. If you, the consumer, can shop at multiple Ford dealers, you can make the dealers compete on price; Ford (NYSE:F) is likewise banned from undercutting the dealers and selling to you directly.

The Georgia case wants to rely on a law that would effectively punish Tesla for its success: "Tesla sells vehicles in violation of the state's rules limiting the annual volume of cars it can sell directly to the public, the Georgia Automobile Dealers Association said in a petition filed with the Georgia Department of Revenue." The current law prohibits the sale of greater than 150 vehicles through direct sales, and said sales must be fully customized; Tesla made 176 sales.

Trouble in China

The agreement between Tesla and China Unicom comes at a time when tensions between the U.S. and China have been on the rise. Each of the big three U.S. technology companies - Apple (NASDAQ:AAPL), Google (NASDAQ:GOOGL), and Microsoft (NASDAQ:MSFT) - have been the targets of either bans or investigations by the Chinese government, often both. Each of these tech bellwethers has been accused of facilitating spying by the U.S., largely as a result of the Snowden incident. The indictment of five Chinese military officers for hacking has sparked what could become a retaliatory environment for technology.

What this means for Tesla remains unknown. Many classify Tesla as an automaker, and, therefore, at the heart of this potential conflict. Still others, however, see Tesla as a Silicon Valley technology company that happens to make cars instead of personal electronics. If the company is classified as a tech company and the animus in that sector intensifies, it could undermine the progress the China Unicom deal represents.

Where the question, I believe, ultimately breaks in favor of Tesla is in the policies it holds regarding intellectual property. When CEO Elon Musk recently opened the company's patent portfolio to the world, he may have bought himself a free pass. While the move only covered U.S. patents, and there is no reason to think that a similar stance would be taken abroad, I believe it represents the type of collaborative approach that could alter perceptions of Tesla abroad.

Ultimately, even at current prices, Tesla remains strong and has upside potential from here. The company's multiples are becoming high, but with projections of rapidly increasing sales and the advancement toward both the gigafactories and a more moderately priced vehicle for the masses, I would buy on any dips. Below $275, I remain a buyer for the long term, recognizing that a broad market correction may cause near term dips.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.