September 29, 2022

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Elon Musk, Tesla Business in China, Xinjiang Points to Dark Future

There are three Elon Musks. Two of them you likely know. The third Musk is a new and chilling development.

The first Musk is the persona he wants to project: a swashbuckling inventor, explorer, and “Person of the Year” who is trying to provide solutions to the existential problems facing humanity.

The second is the petulant Musk who regularly gets into public fights with politicians and ignores calls from regulators. The name-caller who accused a stranger of being a “pedo guy” and called a Wall Street analyst who covered his stock a bonehead. The one who won’t acknowledge critical safety issues with his cars, and refused to shut down his California factory during the COVID-19 pandemic in March 2020.

The third Musk is perhaps the least known, but also the most nefarious. This version of Musk only appears in China. He is compliant, complimentary, and deferential to lawmakers and regulators there. His company is responsive to customers and stories in the media. This Musk had no problem shutting down Tesla’s Shanghai factory at the start of the pandemic. And he had no problem opening a Tesla showroom in a region of the country where the government is committing genocide.

It’s important to grapple with this third Musk because relations between the US and China are at their lowest point in decades. China has turned even further toward autocracy under President Xi Jinping. And like all autocrats, Xi needs friendly relationships with high-profile foreigners to assure the world that all is well. This third Musk has become a tool to whitewash the regime’s crimes against humanity — and given his stature, that is particularly worrisome.

Choose your friends carefully

Despite the fact that Tesla was founded in the US, received billions of dollars in government subsidies, and has three vehicle factories here, Musk’s relationships with US politicians and regulators have been a disaster. Musk once hung up on the head of the National Transportation Safety Board during a call and intimated that the Securities and Exchange Commission should perform oral sex on him. To democratically elected representatives of the country where Tesla was founded, he pays dust, but when it comes to China, Musk bends the knee to autocratic leadership. 

Musk most recently vexed American lawmakers when Tesla announced that it would open a showroom in Xinjiang, the region where the Chinese government is carrying out the genocide of the Uyghur Muslim minority. For years Beijing has sent Uyghurs to reeducation camps and forced them to work at factories run by ethnic Han Chinese moving into the region. Last month, President Joe Biden signed a bill banning all imports from Xinjiang, and calls are growing across Europe for governments there to do the same thing.

To blunt the international outrage, Chinese officials have pressured companies around the world to act like everything in Xinjiang is normal. While some American companies, like Apple and Nike, have worked to remove Uyghur forced labor from their supply chains, Tesla went the opposite route, announcing at the end of last year that it would “launch Xinjiang on its electric journey!” This is exactly the type of support Beijing is looking for.

And while Musk isn’t breaking any US laws, he’s spitting in the face of Washington by selling cars to the people who are profiting from the suffering of Uyghers.

“Certainly, the Han factory owners, whether the labor is forced or not, would be customers,” James Milward, a Georgetown professor of Chinese and Central Asian history, told Insider, adding that “people making money off of land deals, developing new cities in the southern parts of the region to move Han in” would also be likely Tesla customers.

When the news about the Xinjiang showroom came out, politicians from across the political spectrum were appalled. Republican Sen. Marco Rubio tweeted that “nationless corporations are helping the Chinese Communist Party cover up genocide and slave labor in the region.” A Labour Party member in the UK Parliament called it “deeply unacceptable and shameful,” and said Tesla was “complicit in the persecution of Uyghers.”

Kenneth Roth, the head of the nonprofit Human Rights Watch, pointed out that it would be near impossible for Tesla to know whether or not it was using products that had been made with slave labor.

But Elon Musk’s newfound respect for authority and willingness to launder China’s reputation isn’t as hard to wrap your mind around if you understand the terms of his deal with the country’s officials.

What Elon owes China

Musk’s deference can be explained by what Tesla owes China. To build his Shanghai factory in 2019 — the first auto factory in China to be wholly owned by a foreign company — he had to agree to certain conditions that required both the company and its boss to show fealty to the CCP. Tesla owns its factory, but China still owns the land on which it is built. According to three agreements that are publicly available to US investors, Chinese banks also set up a $1.4 billion loan facility for Tesla to build the factory, and the company is required to generate a certain amount of tax revenue in order to stay on the land. Tesla shouldn’t have a problem handling these financial responsibilities, but the Chinese government still has the company over a barrel.

Tesla Shanghai

Elon Musk walks with former Shanghai Mayor Ying Yong in 2019

STR / AFP via Getty Images


There are also subjective requirements in Tesla’s contracts. According to Tesla’s 50-year Shanghai Land Use Right agreement, if authorities need the land back in advance of the 50-year term “for public interest,” they may reclaim it at any time, paying Tesla “indemnifications based on the residual value of the buildings, fixtures and facilities attached to them.” What qualifies as in the “public interest” is not defined.

Authorities can also reclaim the land if tax revenue doesn’t meet its target or the environment around the factory is damaged. In the event that authorities believe Tesla has grossly violated the terms of its contract, authorities could take back the land and everything on it without paying Tesla a dime. And any recourse would go through China’s courts, which are not known for their impartiality.

And as Vicky Bryan, a bond analyst and the founder of the newsletter Bond Angle, told Insider, Musk has even more of an incentive to keep the relationship copacetic. Musk’s clashes with US regulators, Bryan explained, could lead to a future in which Tesla weans itself off its US factories and keeps most of its money and manufacturing in China.

“Just like he picked up his toys in California and went to Texas,” she said.

These issues, along with the fact that China is a growing portion of Tesla’s business, means “China Elon” is always on his best behavior. Take Tesla’s issues in the spring of 2021: It was being absolutely savaged in China’s state-controlled media for ignoring major safety issues; commentators called the company “arrogant,” and sales collapsed. In a stark departure from his more pugilistic nature in the US, Musk quickly struck a more cooperative tone and apologized to customers to ease the pressure.

China’s game, China’s rules

So far, Tesla has had success in China’s fast-growing electric-vehicle market, but domestic competition is getting more fierce.

“As the domestic EV makers get stronger, Tesla will get weaker. The only leverage they’ll have is that they employ tens of thousands of Chinese people,” said Tu Le, the founder and managing director of Sino Auto Insights, a newsletter and consultancy that provides analysis of the Chinese electric-vehicle market.

Over the past year, Tesla’s models have been losing ground to the Hongguang Mini, the hottest-selling EV in China. Sales of Tesla’s Model 3 sedan are floundering in the country, Le pointed out, because consumers prefer SUVs like the Model Y. Tesla has no new models coming out in 2022, which is a problem in China’s dynamic EV market.

“What will likely happen is Musk will play with pricing on the Model Y to make up for the Model 3,” Le said.”In China it’s the law of diminishing returns, though, because there’s always new products. In the US and Europe that trick works, but in China that’s not the case.”

When Tesla was enduring the worst bashing by the Chinese media last year, Le explained to Insider that Musk was being given a clear warning. The government has no problem using foreign companies to build its industries, only to cast them aside when domestic competitors have grown strong enough to replace them. The message was: Be on your best behavior, or you could be on your way out.

Desmond Shum, a Chinese real-estate developer who recently published a book detailing his rise to and fall from the upper echelon of China’s business community, also shared a warning for Musk — one that applies regardless of how servile and obsequious he is to Chinese regulators.

“My message would be this: China’s strategy when they target a certain industry is to get you into China and then eventually, over time, replace all your suppliers. ‘Our supplier will be cheaper’ or ‘It’s reliable.’ Then they take technology away from you,” Shum said, referring to a company’s intellectual property. “Once they replace all your suppliers, you are beholden to them. If you are Elon Musk, that’s what you’re looking out for.” 

“China Elon” has entered a dangerous game with Beijing. Tantalized by China’s huge market, he’s now become a tool for its autocratic government. Beholden to a contract and the promise of future riches, he’s adopted a new alter ego to stay in the government’s good graces. Musk is choosing to play by Beijing’s rules, even when it forces him to contradict Western values. But Beijing can turn on Musk at any time. No amount of obsequiousness will change that.

The spaceships and Twitter memes may get attention, but if you want to understand the future that Elon Musk is trying to shape, ignore his tough-guy persona in the US. It’s this third, docile Musk that is the most dangerous, and he’s just gotten started.

https://www.businessinsider.com/elon-musk-tesla-china-xinjiang-uyghurs-dark-future-2022-1