Trump's trade war casts black cloud over Elon Musk's Tesla

Brian Sozzi

Tesla (TSLA) may have landed in a sweet spot in China just as the calendar gets ready to turnover to 2020, but the Trump administration’s trade war with the country looms as a dark cloud.

And for money-losing Tesla, any disruption of that sweet spot in such a critical market would be unwelcome news.

“China is really going to be fueling the engine, it will be key for them from a growth perspective going into next year as well as the GigaFactory 3 build out. It comes down to being key when it comes to the tariff situation and how Tesla is potentially impacted. I think right now it [the impact] has been tepid. But if this heats up it could definitely be a black cloud for the company which is viewed as a potential positive going into next year,” Wedbush tech analyst Dan Ives explained on Yahoo Finance’s The First Trade.

China is Tesla’s biggest international market by a wide margin, hauling in $1.5 billion in sales through the second quarter. The company reportedly saw strong sales of the Model 3, Model X and Model S in the third quarter in China, following the government’s decision to grant a 10% purchase tax reduction tax to the company.

Sidestepping tariffs

In effect, the move was seen as a gift to Tesla by the Chinese government — it helps Tesla sidestep the cost increases from the 25% tariffs on U.S. auto imports set to kick in on December 15 by unlocking consumer demand. Stoking that demand in China for Tesla is vital — by some accounts, those 25% tariffs along with existing duties on auto imports has raised the potential for autos to cost 50% more in China post December 15.

SHANGHAI, Jan. 7, 2019 -- Guests attend the groundbreaking ceremony of Tesla Shanghai gigafactory in Shanghai, east China, Jan. 7, 2019. (Xinhua/Ding Ting) (Xinhua/ via Getty Images)

But the purchase tax reduction could easily be retracted by the Chinese government if trade tensions with the U.S. continue to escalate, as is currently the case ahead of the resumption of talks this week. That would leave Tesla exposed to the 25% tariffs. Considering Tesla is already ridiculously expensive in China, the company’s sales could be materially hurt until it gets its Shanghai-based manufacturing plant up and running.

Ives is staying somewhat upbeat on Tesla, however.

“I think the doomsday scenarios continue to be off the table. Some of the hate has been overdone, but yet for this stock to move higher Tesla needs to prove itself that it could be profitable on the lower margin Model 3 and what sustainable demand is,” Ives said.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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