Musk's China Trip Spurs Tesla Shares, Eyes FSD Deal

Key Takeaway

• Elon Musk's China trip bolsters Tesla with a 15.3% share price surge after securing a Baidu deal for FSD deployment in China.
• Tesla's push into the Chinese market, with 1.6 million cars, could unlock significant revenue from autonomous driving subscriptions.
• Despite optimism, Tesla faces challenges like regulatory hurdles and fierce competition from local EV manufacturers like BYD.

Tesla's Strategic Moves in China

Elon Musk's recent visit to Beijing marks a significant step for Tesla Inc. as it navigates the complexities of the Chinese market, the world's largest for automobiles. During his trip, Musk met with China's Premier Li Qiang and secured a deal with Baidu, a leading Chinese tech giant, for mapping and navigation systems. This collaboration is crucial for Tesla's ambitions to deploy its "full self-driving" (FSD) system in China. Additionally, Tesla's electric vehicles (EVs) were listed among over 70 car models that passed data security compliance tests by a Chinese industry group, smoothing the path for the introduction of semi-autonomous driving technology in the country.

Tesla's share price saw a significant uptick of 15.3% following the announcement of the Baidu deal, although it remains notably lower than its peak in 2022. The move into China is seen as a pivotal moment for Tesla, given the fierce competition and growing demand for innovative automotive technologies in the region. Analysts like Tom Narayan from RBC Capital Markets and Dan Ives from Wedbush have highlighted the strategic importance of Tesla's expansion in China, noting the potential for substantial revenue from autonomous driving subscriptions and the opportunity for Tesla to set an industry standard for software.

Autonomy as a Revenue Stream

Tesla's push for autonomy, particularly its FSD feature, is a key component of its strategy to generate additional revenue streams. In the United States, Tesla charges a monthly subscription fee for FSD, a system that, while requiring driver attention, represents a step towards fully autonomous driving. The potential to offer this service in China, where Tesla boasts approximately 1.6 million cars on the road, could unlock significant subscription revenue. This move is also expected to bolster Tesla's position in the software domain, potentially prompting other carmakers to license its technology.

The significance of autonomy for Tesla's valuation is underscored by analysts, with Ives referring to the approval of FSD in China as a "watershed moment" for the company. The expansion into China with FSD technology is seen as filling a crucial gap in Tesla's long-term valuation, especially as the company faces intense competition and softer demand within the Chinese market.

Navigating Challenges and Competition

Despite the optimistic outlook following Musk's visit, Tesla faces several challenges in China, from regulatory hurdles to fierce competition from local EV manufacturers like BYD, which holds a larger market share. Tesla's product lineup, including the aging Model Y and the yet-to-be-produced Roadster, is perceived as outdated compared to offerings from Chinese rivals. This raises questions about Tesla's technological edge, particularly as it seeks to deploy FSD in a market with diverse driving conditions and consumer expectations.

The regulatory environment in China, particularly concerning data security and privacy, presents another layer of complexity for Tesla's operations. The company's ability to navigate these regulations successfully, as evidenced by the recent data security compliance and the deal with Baidu, is crucial for its ambitions in China. However, analysts within China remain cautious, pointing out that the regulatory landscape is still evolving and that local competitors are poised to adjust their strategies in response to Tesla's moves.

Street Views

• Tom Narayan, RBC Capital Markets (Bullish on Tesla):

  "Being allowed to offer the same service in China, where the company has about 1.6mn cars on the road, 'would unlock a significant fleet of Tesla vehicles able to charge subscription fees'... The move into China would also 'push Tesla further to be an industry standard for software,' he added, and encourage other carmakers to license its technology."

• Dan Ives, Wedbush (Bullish on Tesla):

  "Musk’s trip resulted in the 'long-awaited FSD approval', which amounted to a 'watershed moment' for the company. Tesla’s long-term valuation 'hinges' on income from autonomy, he said, and China had been a 'missing piece of the puzzle'. This is a key moment for Musk as well as Beijing at a time that Tesla has faced massive domestic EV competition in China along with softer demand."