Tesla Can’t Afford to Get on China’s Bad Side

Tesla (NASDAQ:TSLA) has a brand new problem, and it’s a big one. You’d never know it by looking at the soaring Tesla stock price, but the Chinese government isn’t pleased with Tesla. Following Tesla’s second recall in less than a year in China, the Chinese government publicly warned Tesla that Communist Party  regulators aren’t as lenient as their American counterparts.

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Alibaba (NYSE:BABA) investors know all too well how important it is to keep the leaders of the Chinese Communist Party (CPC) happy. Tesla has a long history of ignoring and abusing safety regulations. If it continues to do so in China, things could get ugly fast for the company.

China Warns Tesla Stock Investors

On Monday, a CPC-controlled Chinese state media outlet, The Global Times, publicly scolded Tesla for its safety problems. It listed major quality complaints, including “unexpected accelerations, battery fires and abnormal over-the-air (OTA) upgrades” among the key issues. These problems are similar to ones that have been reported in the U.S. as well.

The Global Times noted that Tesla has had two major recalls in China in the past year due to “faulty parts.” In October 2020, Tesla recalled 48,442 vehicles in China due to faulty front and rear suspensions. Tesla added another recall of 36,126 vehicles last weekend due to the failures of their touch screens. The recent recall corresponds to a recall of 135,000 vehicles in the U.S. for similar touch-screen problems.

“I’ve never seen such an outrageous lack of responsibility from a company, especially regarding such serious safety issues,” auto analyst Feng Shiming said in the Global Times story. And I’m sure Feng is saying exactly what the CPC told him to say.

Musk Versus Regulators

China is absolutely critical to Tesla as a future growth source, as the automaker’s sales growth in the U.S. appears to be slowing down.  In 2020, Tesla’s sales in China surged over 120% to $6.66 billion. Tesla also invested $2 billion in building a plant in Shanghai that started producing cars in December 2019.

Tesla CEO Elon Musk is regularly defiant of regulators and politicians in the U.S. In China, he bends over backwards to make sure to say exactly what the CPC wants to hear. Last summer, Musk said “China rocks,” adding that Chinese people are “smart” and “hard-working.”

“They’re not entitled, they’re not complacent, whereas I see in the United States increasingly much more complacency and entitlement,” he said.

Musk doubled down in sucking up to the CPC earlier this year.

“It seems ironic, but even though you have sort of a single-party system, they really actually seem to care a lot about the well-being of the people. In fact, they’re maybe even more sensitive to public opinion than what I see in the US,” Musk said.

Of course, this is in sharp contrast to what Musk says about regulators in the U.S.

China Means Business

Musk’s biggest skill isn’t engineering. It’s knowing the right thing to say to the right people to get them on his side. Musk utilizes the exact playbook former U.S. President Donald Trump used to get elected: Telling people whatever they want to hear.

But while politicians and regulators in the U.S. don’t want to risk alienating Musk’s army of young voters, China does not care. Words only go so far if Musk and Tesla don’t back them up with action. China has its own home-grown, next-generation EV companies like Nio (NYSE:NIO) and Xpeng (NYSE:XPEV). And China is not afraid to drop the hammer on a company that falls from its good graces.

Alibaba’s stock plummeted from $319 to $211 late last year just because Jack Ma dared criticize Chinese regulators in public. The CPC cancelled the IPO of Alibaba subsidiary Ant Financial and implemented an antitrust crackdown that could have permanent implications for Alibaba’s business.

Musk ignored California’s safety regulations and reopened Tesla’s Fremont plant in the middle of the pandemic.  He ignored the Federal Aviation Administration’s public safety rules by launching SpaceX’s SN8 rocket in December. That rocket exploded upon landing.

Many Tesla stock investors love Musk’s defiance. China will not. If Tesla doesn’t change its ways, Tesla stock could take a major hit from China. And it has a lot further to fall than Alibaba did.

On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. He is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.

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