Tesla vs. Shanghai Government Negotiation Report
Tesla Inc. a US automaker, energy storage and solar manufacturer wants to expand into the Asian market by constructing a plant in China to manufacture its Models S, Model X and Model 3 electric vehicles (EVs). The company has selected China because it offers valuable resources and a cheap labor force that would be very beneficial to them. It also hopes to be a steppingstone in repairing trade issues that have been going on between China and the USA if they reach a plausible agreement.
Tesla Inc. has selected Shanghai, which is the biggest city in China and a global financial hub as their preferred destination to set up their plant. The Tesla delegation is planning a virtual meeting due to the Covid19 travel restrictions through which they will present the project and negotiate outstanding issues with the delegation from the city of Shanghai which could lead to a win-win situation for both parties
Leasing plant for automobile Assembly Plant
Tesla would like to ask for a 99 years-lease land to bring its multi-million-dollar electric vehicle production plant to Shanghai. Having a plant in Shanghai is extremely important to make this a successful venture. However, the production plant will be extremely time consuming and costly. The company needs a sufficient amount of time to make a return on its investment.
Benefits to the city:
Tesla’s multi-million-dollar plant would bring a lot of benefits for the city of Shanghai and its people. To begin with, huge direct investment from Tesla would give stable income and high movement of capital to the city of Shanghai for a long time, which could greatly contribute to its economic growth. For citizens, they can enjoy thousands of job opportunities. For the local car industry, they can learn from the state-of-the-art technology that Tesla will introduce to the market.
Government Official Representatives
Tesla is proposing to be in charge of all management positions inside the Shanghai plant since we do not see the necessary to have Chinese official representatives on site.
Chinese Corporation Law does not require foreign ownership. Therefore, having fewer external representatives inside the plant’s operation will speed up the process of decision-making with no disruption from external sources.
Tesla wants to bring its employees from the U.S. headquarter to make up for 70 percent of the director board in Shanghai plant.
This will strengthen the quality of training processes and make sure the plant’s operation and performance are in accordance with the company’s value.Tesla opening a new plant in Shanghai will not only provide jobs for the Chinese employment market, but also contribute to the Chinese economy and society. Chinese employees will be educated and trained with the latest technology about zero-energy facilities, electricity-powered car productions. This will result in several highly skilled employees that will benefit Chinese industry and the economy in the long run.
Agreement on car purchase between Tesla and the Shanghai government
Tesla proposes the Shanghai Government to purchase Tesla cars for their executive officials. This will have positive effects on the Shanghai government’s image as being a pioneer in technology and an environment-responsible institution.
Tesla’s sales of cars to the Shanghai government will be a huge financial and taxation support. Government officials using Tesla cars will encourage Chinese people to find alternatives to electric cars and be more responsible for the environment.
Tesla is proposing to have a sales tax exemption of 15% without having to partner with a Chinese company. Tesla is asking for 15% tax exemption but is willing to settle for a minimum of 5%.
The exemption of tax will help Tesla increase our saving and offer more benefits for Chinese workers. FDI from Tesla will help the Shanghai government improve the economic structure of the country. New technology offered by Tesla also has the role of a stepping stone for the development of Chinese high technology industry.
Negotiation Worksheet 1
Issue 1 – Land Leasing for electric vehicle production plant
|Tesla would like to ask for a 99 years-lease land to bring its multi-million-dollar electric vehicle production plant to Shanghai.
The production plant will be extremely time consuming and costly. The company needs a sufficient amount of time to make a return on its investment.
|The Shanghai Government does not want to lease land to foreign companies for over 30 years.
|Tesla is willing to accept a land lease term of minimum 50 years. The company also want to be prioritized to renew the lease at the end of term. BATNA for Tesla: minimum lease land term of 50 years
|The government of Shanghai would only agree to a maximum lease of 30 years. BATNA for Shanghai Government: maximum lease land term of 30 years
|– Labors in Shanghai is considerably unexpensive. – Tesla would not have to care about exporting costs. – Long-term land lease allows Tesla to confidently invest in its plant
|-The government will receive direct investment with stable and significant income for many years. -Thousands of Shanghai citizens will get employed by the plants. – Tesla will bring state of the art technology to Shanghai which gives the domestic industries an opportunity to learn from.
|Tesla accepts to sign a 30-year deal with an option to extend the term up to 25 years. Tesla agrees not to transfer the contract to any other companies or organizations for the whole term.
|Shanghai Government would consider giving Tesla an option to extend the lease land term up to 25 years. However, Tesla will not be allowed to transfer the lease to any other entity.
|Tesla agrees to a 30-year lease deal with the option to extend prior to the conclusion of the lease term up to another 25 years. Tesla cannot transfer the lease to any other entity except the government of Shanghai.
Negotiation Worksheet 2
Issue 2 – Government official representatives
|Tesla lawyers checked the laws of the People’s Republic of China. It doesn’t require any foreign ownership. However, the government has an authority to ask for some government officials to be appointed in management positions in the plant. This is Tesla’s manufacturing plant and Tesla wants to be in charge of all role appointments. Tesla doesn’t see any need to have a government official representative in any management position.
|Shanghai Government wants to have some people in the manufacturing plant. The government wants Tesla to appoint a government official to be one of the head of assembly lines to be on top of the production, health and safety rules. Shanghai Government insists that this is a common practice that the Chinese city governments apply when a big, foreigner companies expand to China and want to build large manufacturing plants.
|Tesla is willing to accept 1 to 3 government representatives in management positions. BATNA for Tesla: max. 3 representatives
|Shanghai Government wants 2 to 5 representatives permitted in the plant. BATNA for the Government: min. 2 representatives
|Keeping as few external people as possible in the plant will allow Tesla’s management to be more comfortable to manage their own plant. This will also help them make decisions quicker and easier without any interruption from the government.
|Having some representatives in the plant will allow the Shanghai Government to be aware of whether everything is in accordance with the laws and regulations. Besides, this will affect their decision on whether Tesla’s lease will be extended in the future or not.
|Tesla accepts to appoint 2 government officials in management positions as long as such roles are limited with 1 year. After 1 year they will no longer be needed in the plant.
|Shanghai Government forgoes 3 representatives and accepts to have only 2 to be appointed in the plant.
|The parties agree that 2 government representatives will be appointed in management positions, preferably as head of assembly lines or executive team member. One of the representatives will be in the role for 1 year, after 1 year such position will be closed. The other representative will leave after 2 years.
Negotiation Worksheet 3
Issue 3 – Employment
|Employment is a major issue for a densely populated city like Shanghai. High-quality workers are also a crucial need for the stability and development of the city.
|Shanghai’s urban development is inseparable from the support of high-tech new energy companies. There are many high-quality talents in Shanghai. They want relevant jobs and chances.
|Tesla aims to bring people from headquarters in the U.S. to build the manager board for the plant in Shanghai since they are experienced and understand the manufacturing process of Tesla. BATNA for Tesla: Foreign managers coming from the U.S. headquarter will make up for 70% of the manager board.
|The government of Shanghai wants more management positions to be taken by local employees. Also, the government wishes to reduce the percentage of foreign personnel and leave more opportunities to Chinese employees. BATNA for the Shanghai government: Reducing foreign managers to 20% of the manager board and leave the remaining vacancies for local employees.
|Employees will be educated and trained in the latest technology, about zero-energy facilities, electricity-powered car production. This will result in several highly skilled employees that will benefit Chinese industry and the economy in the long run. Also, deploying managers from Tesla’s headquarters will contribute to the quality of the training process in terms of technology knowledge and operation goals.
|Chinese labor resources are capable of management roles. It will be a huge advantage for Shanghai’s society development if more local employees receive training and learning on management level.
|Tesla is willing to have more management positions being held by local employees. Tesla reports that its employees will be given several promotion opportunities.
|The Shanghai government will provide additional legal assistance for Tesla’s delegates and encourage qualified candidates from Chinese universities to apply for jobs at Tesla.
|Tesla and the Shanghai government came to an agreement that 35% of the Tesla’s director board will be held by foreign delegates from the headquarter. The position of Human Resources officers will be held by foreign delegates since they are needed for the recruiting and training process. The remaining proportion will be open to local candidates.
Negotiation Worksheet 4
Issue 4 – Tesla fleet for Shanghai officials
|Tesla wants Shanghai Government to purchase Tesla cars for some of its executive officials at a wholesale discount of 30%. This will be good for the reputation and image of Shanghai as a high-end electric car. The wholesale of 2,500 cars will make a good profit.
|The same discount has been offered by Chinese electric car companies such as BYD, Nio, Xpeng to Shanghai Government. For them to turn the other companies down, Shanghai wants to increase the discount because they do need a fleet of cars.
|Tesla can go with 30% up to a maximum of 50% discount on wholesale price for Shanghai Government. Giving them a discount builds relationships for all negotiations on the table and future ones that might come up. BATNA for Tesla: Tesla is willing to offer the Shanghai Government a fleet of 2,500 electric cars at 50% discount on the selling price.
|The Shanghai Government is providing a lot of financial and taxation support to Tesla. Shanghai Government can accept 70% discount along BATNA for Shanghai: Government would like to receive a fleet of 2500 electric cars at 70% discount along with free maintenance for up to One Year.
|Tesla gets to sell 2,500 at wholesale and builds a strong relationship with the Shanghai Government. This will help them get good deals in the future. Government officials using Tesla cars would be good PR. The extra funding can also go to further R&D to improve on their design and efficiency.
|The government benefits from a good deal and discounts that could be a sign of building a strong relationship with the company. Tesla cars would be a status symbol for government officials.
|Tesla concedes and agrees to half a year of free maintenance for the 2,500 electric cars.
|Government accepts 55% discount on 2500 electric cars from Tesla.
|Tesla and the Shanghai government make a final settlement of 55% discount and half a year’s worth of free maintenance on 2,500 Tesla electric cars.
Negotiation Worksheet 5
Issue 5 – Tax Exemptions
|Tesla requests that the Shanghai Government grant them a sales tax exemption of 15% without having to partner with a Chinese company.
|Shanghai Government wants Tesla to partner with a China based car manufacturer to get tax exemptions.
|Tesla is asking for 15% tax exemption but is willing to settle for a minimum of 5%. BATNA for Tesla: Tesla is willing to settle for 5% sales tax exemption. They will not consider partnering with a Chinese car maker.
|Since Tesla is leasing land from Shanghai, employing Chinese workers and engineers, and will be paying millions in taxes for the factory and employment, they decide to agree but only to a maximum of 12.5% exemption. BATNA for Shanghai Government: Shanghai authorities are willing to settle at a max of 12.5% tax exemptions without the requirement to partner with Chinese company.
|This will benefit Tesla because they would be able to sell their cars at a lower price. They would then be able to sell more Tesla cars in China. Additionally, Tesla can use the added savings to enter new international markets.
|This will benefit Shanghai because they would have less pollution and a healthy competition in electric cars. This will also benefit Shanghai by building a stronger relationship with Tesla.
|Tesla concedes and agrees to 10% discount.
|Government agrees that Tesla does not partner with a Chinese company and grants them the discount but only 10%.
|Tesla and the Shanghai Government settle at a final agreement of 10% sales tax exemption without a Chinese company to partner with.
On December 5, 2020, two delegations met on behalf of Shanghai, China and Tesla Inc, to negotiate five crucial issues about the expansion of Tesla in the Asian market by constructing an electric vehicle manufacturing plant (EV). The negotiations ended successfully with the following agreements made:
1. Both parties agree to a 30-year lease with the option to extend it before the end of the lease term for another 25 years; however, Tesla agrees not to transfer the lease to any other entity except the Shanghai government.
2. Both parties’ delegations agreed that two (2) government representatives will occupy managerial positions, preferably as head of assembly lines or executive team members. One of the representatives will be in the office for one year; after one year, the position will be closed. The other representative will leave after two years.
3. Delegations from Tesla and the Shanghai government agreed that only 35% of Tesla’s board of directors would be held by foreign delegates from headquarters, with local candidates occupying the remaining 65%. On the other hand, the Shanghai government will provide additional legal assistance to Tesla delegates and will encourage qualified candidates from Chinese universities to apply for jobs at Tesla.
4. Delegates from Shanghai agreed to purchase 2,500 Tesla electric cars for official use at a 55% discount and six months of free maintenance. It makes it possible to strengthen the relations between the two parties.
5. Tesla delegations and the Shanghai government reached a final agreement. The government agreed to increase the sales tax exemption for tesla to 10%. On the other hand, the Tesla delegation agrees to lease 2,100 acres of land for $ 2 billion to build its manufacturing plant.