Tesla caught in the crossfire of a brewing tech Cold War with China

Tesla founder and chief executive Elon Musk. Photo / AP

It is hard to see how Elon Musk's views on Communism would have passed muster during China's cultural revolution. The outspoken Tesla boss gave his verdict on Karl Marx last July in a meme posted on Twitter, which summarised the message of Das Kapital as: "Gib me dat for free."

Today, though, the world's most prominent remaining Communist Party is important to Musk's business. Blockbuster production numbers from Tesla's new Shanghai "gigafactory" have helped drive its near-700 per cent increase in share price since January 2020, which has made Musk the second richest person on Earth - all underpinned by a productive relationship with China's government.

That relationship hit a major speed bump last month when Chinese officials reportedly banned military staff and employees at sensitive state-owned companies from driving Tesla's cars, over fears that their data collection via sensors and video cameras could become a security threat.

Musk has rebuffed those fears, insisting that if the electric car company was used to spy by any nation it could be shut down. "There's a very strong incentive for us to be very confidential with any information," he told a prominent Chinese forum.

Dan Ives, an analyst at investment firm Wedbush, says: "With a brewing Cold Tech War between the US and China, Tesla remains caught in the crossfire."

Experts and veterans of the Chinese auto industry say Musk will need to work hard to ensure his automotive behemoth does not become an inverse case of Huawei, the Chinese tech giant that has had its ambitions battered by similar security concerns from the US government.

"If I'm Tesla, I would find it disconcerting," says Michael Dunne, head of the Chinese-focused automotive consultancy ZoZo Go, who lived and worked in China from 1990 to 2016.

He describes the move as a shot across the bow - or, as one Chinese idiom would have it, "showing a little colour".

Chinese officials would already have known that Tesla cars are constantly recording video from their eight exterior cameras, as well as collecting real-time data on location, speed, cabin temperature, air bag use and battery charging. So why object now?

"One has to come away with the conclusion that this is politically motivated," says Dunne. "In my experience, this is a reminder to foreign companies that no matter how well you're doing, don't forget who's in charge."

It is a marked change from what Dunne calls China's previous "red carpet" approach, which saw the Giga 3 facility approved and built in "record time" with 9 billion yuan ($1.9b) loaned by state-backed banks.

Notably, Tesla was one of the first outside automakers to be allowed to set up in China without a 50-50 joint venture with a domestic company.

Chinese officials have traditionally been protective of state companies, and the country has a healthy electric vehicle industry (EV).

But Dunne says that China's cars were "unsexy and forgettable", sold mostly to taxi firms, state agencies and individuals who benefited from government subsidies.

Tesla, by contrast, created a craze for EVs among educated, wealthy people. That changed the nature of the Chinese EV market, and advanced China's ambition of becoming a global epicentre for EV production and sales.

The result for Tesla has been a heavy dependence on China. It recorded US$6.7b ($9.4b) worth of sales there last year - double that of 2019 and more than a fifth of its total revenue.

"China is a really big part of Tesla's short-term plans, over the next five years it is crucial to them to hit their targets," says Simon Moores, the managing director of battery data firm Benchmark Mineral Intelligence.

It will be some years, Moores adds, before Tesla's impending gigafactories in Germany and Texas will match up. He says that Tesla has more options in China than Huawei did in America.

"Tesla could easily come to some negotiation where the servers for Tesla are based in China, or some sort of information sharing agreement."

But Paul Triolo, a former US government adviser on Chinese technology who now runs the global technology team at Eurasia Group, argues that the real problem may lie on the other side of the Pacific. Tesla's manufacturing involves plenty of advanced technology.

"Tesla could draw scrutiny from the US government around the potential for advanced technologies to be transferred to China via Tesla's operations there," says Triolo.

- Telegraph Media Group.