A Tesla Model 3 electric on display at the China Auto Show 2018. Photo: AFP

Tesla Motors’ recently announced plan to produce and sell electric cars in China suggests that Elon Musk is desperate or naive – or maybe a bit of each. He wouldn’t be the first aspiring automaker to roll the dice to keep his company afloat. One recalls John DeLorean (of the eponymous Back to the Future car fame), who was charged with organizing a cocaine deal when his car company ran into financial trouble in the 1970s.

Musk is not dealing drugs, and China is a big market – a billion plus people – with serious air-pollution problems. Tesla electric cars should sell well. And they might. For a while at least.

Here’s the problem. The Chinese government wants in on the electric-vehicle business – and wants Chinese companies in on it too. The government’s “Made in China 2025” policy aims to do just that, and not in a live-and-let-live, fair-competition sort of way. Rather, it intends for Chinese companies to dominate and put foreign ones out of business.

Tesla is not the first foreign company welcomed into China with seemingly open arms. However, red-carpet welcomes are not predictors of subsequent successes.

Take Motorola. At the time one of America’s most successful technology companies, it jumped into China a couple of years after the 1989 Tiananmen Square massacre and set up state-of-the art manufacturing operations in the Tianjin Economic Development Zone.

It did everything right and ingratiated itself with the Communist Party of China (CPC), and was recognized as an “anchor tenant” that would restore global investor confidence that it was business as usual in the People’s Republic of China (PRC) after Tiananmen.

But Motorola also unwittingly built its own competition. Today the company is a husk of its old self – and is Chinese-owned.

Tesla’s shareholders ought to be concerned. Even though the deal is being billed as a win-win, they might ask: “Why will Tesla succeed where others have not?”

This could be a classic example of diverging objectives: The PRC government wants to create Chinese electric vehicle companies – and globally competitive, indeed dominant ones. Tesla wants to sell a lot of cars and make a lot of money. It might also implicitly believe it will always be ahead of the Chinese competition. If so, Tesla isn’t the first company to make that condescending and dangerous mistake when it comes to China.

Any foreign company operating in China should expect to lose its technology, or other sensitive, proprietary information that it brings into the market. And in Tesla’s case it’s not just car and battery technology, but business plans and manufacturing processes

Any foreign company operating in China should expect to lose its technology, or other sensitive, proprietary information that it brings into the market. And in Tesla’s case it’s not just car and battery technology, but business plans and manufacturing processes.

Employees taking intellectual property and moving to rival companies is a risk. Government-sponsored spying is even more of a danger.

It’s an easy espionage task for the Chinese. They are no slouches when it comes to cyber-espionage, and theft from afar is no problem – as Japanese and American companies and governments among others have learned. Things are even easier when the target is inside China.

Once Tesla hires local staff, obtaining the crown jewels gets simpler. It’s hard to imagine anyone turning down a request for assistance from the Ministry of State Security. Those who do so (or their relatives) can expect an invitation to come “for a cup of tea” with MSS. That’s usually enough.

But won’t Tesla employees sign non-disclosure agreements and non-compete agreements? Yes they will. It doesn’t matter.

One might give even odds, or better, that within five to 10 years a factory that looks exactly like a Tesla factory will appear – but with different signage – turning out curiously similar cars.

Musk might argue that his case is different, and highlight his company’s special relationship with powerful Chinese officials. As evidence, he can cite that Tesla is the first foreign automaker not required by the Chinese government to take on a local partner.

But that is only a tactical concession – and really doesn’t matter.

Tesla is subject to the CPC’s capricious whims, and the authorities will get the information they want as they gradually turn up the heat. Over time, Musk may come to feel like he has just parked his Tesla in Newark, New Jersey, at midnight, when a gang of street toughs tool up and one remarks, “Hmmm, nice car …”

If Tesla and Elon Musk stumble financially or otherwise in the US, or when Tesla is no longer needed in China, expect the Chinese government to offer to take the operation off Musk’s hands.

One American observer commented recently, “Mr Musk is as vulnerable to debt as Venezuela. Tesla will be an easy meal when the CPC decides to slaughter and eat it.”

It’s not US President Donald Trump’s trade war that will endanger Tesla in China. It’s the CPC and the Chinese market itself. Tesla shareholders might want to ask Elon Musk why he’s sure this move is a “win-win” – and if so, whether that double victory includes the shareholders.

Grant Newsham

Grant Newsham is a senior research fellow at the Japan Forum for Strategic Studies in Tokyo with more than 20 years' experience in Japan and elsewhere in Asia as a US diplomat, business executive, and US Marine Corps officer.

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