China is a key market for Tesla, but keep expectations 'very low,' Morgan Stanley says

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Tesla has ambitious growth targets in China that make Morgan Stanley “cautious,” exemplified by recent trade issues, analyst Adam Jonas said in note to investors Wednesday.

“After Chinese authorities temporarily suspended customs clearance for imported Model 3s, citing ‘irregularities’ including improper labeling … we would keep medium/long-term expectations for Tesla’s ability to run a profitable Chinese business very low,” Jonas said. Jonas is widely followed on Wall Street due to his early work covering Tesla and electric vehicles.

Tesla said on Tuesday that the company has “already reached a resolution with Chinese customs, and we are working closely with them to resume clearance procedures on these vehicles.”

While that resolution is good for Tesla in the status quo, Jonas said the issue “highlights the risks inherent” to U.S. automakers and technology companies who want to conduct business in China – especially for areas “that may become sensitive along the grounds of data privacy, cybersecurity, robotics, and [artificial intelligence].”

President Donald Trump continues to push hard for a trade deal with China and Jonas believes that the result of those negotiations will likely be very important to Elon Musk’s company.

“Tesla’s future in China may be highly dependent on a constructive trade relations and economic policies with the US,” Jonas said.

Jonas also gave several more reasons he said Morgan Stanley will “remain cautious on the role of China in Tesla’s long germ commercial strategy and fundamental value,” including:

  • The “unquantifiable risks” from technology transfers between American and Chinese companies.
  • There are “dozens of Chinese domestic EV startups” that could eat market share from Tesla.
  • China’s government controlling its auto industry as “a public transport utility operated as a public good,” which “may limit the role of foreign entities.”

Morgan Stanley has an equal weight rating on Tesla shares and a $283 price target, or about 2.4 percent from Wednesday’s open.

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