skyrocketing and Tesla needs the

world's largest auto market in order to succeed.

China produced half of global electric

vehicles last year. The United States

produced about 20%. China's clearly

way out in front of the United States

in terms of size and production scale.

Analysts are expecting that in around

five years, EV's and hybrids will

represent about 20% of the

overall vehicle market around the

world. Just the size of the Chinese

market is so appealing to anyone that makes cars.

China is one of the biggest proponents

of electric vehicles. In 2017, China

sold 777,000 new energy vehicles, a 53 % increase over 2016. And China is

expected to reach 2,000,000 EV's by 2020.

Since 2012 , there's been more than $60 billion in direct subsidies to lower

the cost of electric vehicles for

Chinese consumers. So by the time an

electric vehicle lands in a Chinese

driveway, it may cost as little as $10,000 to $12,000.

But Tesla has faced one big

disadvantage. In China, which is the

biggest market for EV's we have never

had any subsidies or tax incentives for

vehicles. Trade tensions that led to

high taxes for U.S. autos imported to

China have hurt Tesla's bottom line. An

$80,000 Model S in the United States

runs about $140,000 in China after

taxes. To succeed in the region Tesla

has no choice but to make its cars there. Once they can start

manufacturing domestically in China,

they can evade some of the costs of those tariffs.

They'll have a local supply chain setup.

It will just alleviate so much pain for them.

This is why Tesla broke ground on a new

factory in Shanghai this year and Elon

Musk is rushing to start production.

We need to bring the Shanghai factory

online. Our car is just very expensive

going into China for import duties, we

got transport costs, we've got higher

cost of labor here and we've never been

eligible for any of the EV tax credits.

Once the cars made there it is eligible

for that. The new Gigafactory is also

what will allow Tesla to offer the

Model 3 at an affordable price.

Bottom line is we need the Shanghai

factory to achieve that 10k rate and

have the cars be affordable. The

inhibitor is affordability. If we made

it more affordable, the demand is extraordinary. Allowing

foreign automakers to come in and own

their own factory and operate

domestically in China was huge for

Tesla. China's going to be a massive

theme for Tesla in 2019. So much of

their future business hinges on how

well they do in China. How quickly they

get that factory up and running.

The Chinese government has helped Tesla

tremendously by giving them a special

dispensation so that they can be an

independent foreign auto manufacturer

in China without needing a local partner.

Tesla's not required to have a joint

venture partner, it can own 100%

of its operation here. That's a real

nice break in timing for Tesla. It'll

allow them to control their operations

in China, which no other global

automaker has been able to do so far.

Just because Tesla is opening a factory

in China isn't a guarantee that it will be a success.

Tesla has to sell these products at a

profit. They still have to get the

consumer to fork over a huge amount of

money for their product.

But perhaps the biggest challenge Tesla

faces in China is steep competition

from established players. Companies

making EV's in China

they range from really large players

like BYD, which is backed by Warren

Buffett and BAIC, which is backed by

the Chinese government there. Porsche

has the Taycan, Jaguar has I -PACE, to

new players like NIO. Tesla's got a lot

of competition locally in China.

NIO is basically the pioneer. We're the

first with a premium electric vehicle

in China and the only other company

with a premium electrical SUV in China

is Tesla with Model X. Ours comes in

less than half the price. So we think

we compete very well and is customized

for the modern Chinese family.

It's a variety of long established

brands like General Motors, Volkswagen.

Ford is participating in this as well

but they have oftentimes paired up with

other Chinese based companies like BYD,

Geely, SAIC. Unlike the U.S., China's

EV manufacturers have focused on

creating short range, low cost and low speed electric vehicles.

With most coming in under $20,000. I

think their biggest risk will be to a

certain extent companies like NIO that

have a lot of cash and have invested a

lot in the design of their cars and

have some kind of interesting things

maybe that are the next level.

Aside from the larger automakers

numerous startups are also entering the

space. According to our own database,

there are at least 50 Chinese startups

in the electric vehicle spaces that's

phenomenal when you think about it.

Some of Tesla's biggest competition

however, could come from other foreign

luxury brands also entering the Chinese

market. Automakers like Porsche, Audi

and Mercedes are all releasing EV's in

2019 that will compete directly with Tesla.

A company like Mercedes has been in

China for a long time. They've got a

network to sell cars so they've got

this head start, especially on the

network part of it right. They've

already got their factories running and

then here comes Audi, here comes

Mercedes, here comes BMW with battery

electrics sort of for the first time. I

think there's no way they can't go to China.

You can't ignore a market of that size

especially if you're a luxury brand.

But even in a crowded market, Tesla

could still be a formidable player in China.

One thing Tesla has going for it in

China is the appeal of this Western

brand. They're an early mover in EVs.

They really made EVs into a luxury thing

instead of these little short hop kind

of golf carts. And the appeal of Elon

Musk is there too. He's a wild character.

He's an outspoken, unconventional CEO

and people are really committed to the company's mission.

You know they believe in it. The good

news for Tesla is that China is home to

the largest luxury car market in the world by far.

And Chinese buy twice as many luxury

cars as Americans do. More than two

million last year. So there's no

question the potential is there. It'll

come down to execution. Can they get

that plant in order and running quickly

and make sure the quality is there? The

Chinese will be forgiving on price but

not on quality. If there's any quality

issues, they can be punishing.