As of right now, Tesla doesn't need to panic over disruptions caused by China's heat wave

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As of right now, Tesla doesn't need to panic over disruptions caused by China's heat wave

In recent weeks, parts of China have experienced record high temperatures, prompting local governments to shut down battery plants. Investors have likely been rattled by news headlines like "China heat wave shuts Tesla suppliers". Is China's scorching heat affecting the EV giant?

The first thing we need to do is determine which factories are affected. In the landlocked province of Sichuan, lithium battery giant CATL is among the companies ordered to close their operations. The provincial government is rationing electricity during the pause, which lasts from August 15-20.

Despite CATL, a major battery supplier to Tesla, having trouble fulfilling some orders, Tesla is not expected to bear the cost. As CATL has production plants all over China, from Guangdong to Jiangsu, it's unlikely that a temporary, regional rest would cause the multi-billion company's supply chain to collapse.

As a result of Tesla's reputation and sheer volume, suppliers prioritize Tesla's demand. In the first half of 2021, the American manufacturer ranked third in terms of sales of electric vehicles in China. In China, Tesla has the same privilege as Apple, with many manufacturers competing to supply it. Suppliers will likely prioritize Tesla's orders in the event of production restrictions, TechCrunch reported.

A Chinese EV startup employee pointed out to us that the supply chains for Tesla and its local rivals, such as Xpeng and Nio, are concentrated in manufacturing hubs around the Pearl River Delta, which includes cities like Guangzhou and Shenzhen, as well as the Yangtze Delta, which includes Tesla's Gigafactory in Shanghai and scores of chip makers around Suzhou.

The heat wave in China has affected Shanghai, but Gigafactory production has not yet been affected. In spring, Gigafactory had to halt production twice after a COVID-19 outbreak lasted two months. This sporadic COVID-induced shutdown has prompted Tesla suppliers to become more flexible over the past two years. To absorb COVID shocks, large manufacturers stock up on supplies.

The Chinese economy is gathering steam to recover its sluggish growth no matter what it takes. If resources are limited, the EV sector, which has been designated as the state planner's top priority, is likely to receive greater support.

The heat wave puts a strain on the country's ability to stay competitive, vice premier Hang Zheng said.“As part of the policy support, the country will also take multi-pronged measures to help related enterprises overcome difficulties,” Han added.

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