From the New York Times, I'm Katrin Benhold. This is The Daily. Today, the story of how China gave Tesla a lifeline that saved the company, and how that lifeline has now given China the tools to beat Tesla at its own game. My colleague, Mara Wistendohl, explains. It's Tuesday, April ninth. So Mara, you've spent the past four months investigating Elon Musk and his ties to China through his company, Tesla. Tell us why.

Well, a lot of American companies are heavily invested in China, but Tesla is special. As When my colleagues and I started talking to sources, we realized that many people felt that China played a crucial role in rescuing the company at a critical moment when it was on the brink of failure, and that China helps account for Tesla's success, for making it the most valuable car company in the world today, and for making Elon Musk ultra-rich.

That's super intriguing. So maybe take us back to the beginning. When does this story start?

So the story starts in the mid-2010s. Tesla had been this company that had all this hype around it, but- A lot of people were shocked by Tesla's earnings report.

Not only did they make a lot less money than expected, they're also making a lot less cars.

Tesla was struggling. The delivery of the Model 3 has been delayed yet again. Tesla engineers are saying 40% of the parts made at the A Fremont factory need reworking. At the time, they made their cars in Fremont, California, and they were facing production delays.

Tesla is confirming that Kalosha is investigating the company over concerns over workplace safety.

Elon Musk has instituted a famously grueling work culture at the factory, and that did not go over well with California labor law. The federal government now has four active investigations involving involving Tesla. They were clashing with regulators. The National Transportation Safety Board will investigate a second crash involving Tesla's autopilot system. Billionaire entrepreneur Elon Musk. Friends are really concerned about him. That's what Musk told the New York Times. And by 2018, he was having all of these crises. According to the Times, Musk choked up multiple times and struggled to maintain his composure during an hour-long interview about turmoil at his electric car company, Tesla. So all of this converged to put immense pressure on him to do something.

And where does China come in?

Well, setting up a factory in China in a way would solve some of these problems for Musk. Labor costs were lower, workers couldn't unionize there. China provided access to this steady supply of cheaper parts. Elon Musk was set on going to China, but First, Tesla and Musk wanted to change a key policy in China.

What policy?

They wanted China to adopt a policy that was aimed at lowering car emissions. The idea was that it would be modeled after a similar policy in California that had benefited Tesla there.

Okay, so explain what that policy actually did, and how did it benefit Tesla?

California had this system called the Zero Emission Vehicle program, and that was designed to encourage companies to make cleaner cars, including electric vehicles. They did that by setting pollution targets. Companies that made a lot of clean cars got credits, and then companies that failed to meet those targets that produced too many gas-guzzling cars would have to buy credits from the cleaner companies.

California is trying to incentivize companies to make cleaner cars by forcing the traditional car makers to pay cleaner car makers, which basically means dirtier car makers are effectively subsidizing cleaner cars.

Yes, that's right. And Tesla, as a company that came along just making EVs, profited immensely from this system. And in its early years, when Tesla was really struggling to stay afloat, the money that it earned from selling credits in California to polluting car companies were absolutely crucial. I mean, so much so that the company structured a lot of its lobbying efforts around this system, around preserving these credits, and We talked to a former regulator who said as much.

How much money are we talking about here?

From 2008, when Tesla unveiled its first car, up until the end of last year, Tesla made almost $4 billion by selling credits in California.

Wow. So Musk basically wants China to recreate this California-style program, which was incredibly lucrative for Tesla there. They're Basically holding that up as a condition to their building a factory in China.

Right. And at this point in the story, an interesting alliance emerges because it wasn't just Tesla that wanted this emissions program in China. It was also environmentalists from California who had seen the success of the program up close in their own state. If you go back to that period, to the early 2010s, I was living in China at the time in Beijing and Shanghai, and it was incredibly polluted. We called it an airpocalypse at times. I had my first child in China at that point, and as soon as it was safe to put a baby mask on her, we put a little baby mask on her. There days where people just would try to avoid going outside because it was so polluted. Some of the pollution was actually wafting across the Pacific Ocean to California.

Wow. So California is experiencing that Chinese air pollution firsthand, and in a way has a direct stake in luring it.

That's right. So Governor Jerry Brown, for example, this became his signature issue, was working with China to clean up the environment, in part by exporting this emission scheme. It was also an era of a lot more US-China cooperation. China was seen as absolutely crucial to combating climate change. You had all these groups working to get this California emission scheme exported to China in the governor's office and environmental groups and Tesla, and it worked. In 2017, China did adopt a system that was modeled after California's.

It's pretty incredible. So California basically exports its emissions trading system to China, which I imagine at the time was a big win for California and environmentalists, but it was also a big win for Tesla.

It was definitely a big win for Tesla. And we know that in just a few years, Tesla made almost $1 billion from the emissions trading program it helped lobby for in China. Elon Musk goes on, builds a factory in China, and he does so in Shanghai, where he builds a close relationship with the top official in the city who actually is now the number two official in all of China, Li Qiang. Wow. So according to Chinese state media, Elon Musk actually proposed building the factory in two years, which would be fast. Li came back and proposed that they do it in one year, which things go up really quickly in China, but even for China, this is incredibly fast. And they broke ground on the factory in January 2019, and by the end of the year, cars were rolling off the line. Then in January 2020, Musk was able to get up on stage in Shanghai and unveil the first Chinese-made Teslas. Really what I think, the The Tesla team and the government officials that have been really helpful in making this happen. Next to him on stage is Tesla's top lobbyist who helped push through some of these changes.

Everybody can tell.

I mean, Elon is super, super happy today.

. And she says, Music, please. Cue the music. And he actually broke into dance. He was so happy. Kind of awkward dance.

And what is the factory like?

The Shanghai factory is huge. 20,000 people work there. Tesla's factories around the world tend to be pretty large, but the Shanghai workers work more shifts. When Tesla set up in China, Chinese banks ended up offering Tesla $1.5 billion in low-interest loans. They got a preferential tax rate in Shanghai. This deal was so generous that one auto industry official we talked to said that a government minister had actually lamented that they were giving Tesla too much. It is an incredibly productive factory. It's now the flagship export factory for Tesla.

It opens in late 2019, and that's, of course, the time when the pandemic hits.

Yes. I mean, you might think that this is really poor timing for Elon Musk, but it didn't quite turn out that way. In fact, Tesla's factory in Shanghai was closed for only around two weeks, whereas the factory in Fremont was closed for around two months.

That's a big difference.

Yes, and it really, really mattered to Elon Musk. If you can think back to 2020, you might recall that he was railing against California politicians for closing his factory. In China, the factory stayed open. Workers were working around the clock, and Elon Musk said on a podcast- China rocks, in my opinion. China rocks. There's a lot of smart, hardworking people, and they really They're not entitled. They're not complacent. We've seen a lot of momentum and enthusiasm for electric vehicles, stocks, and Tesla certainly leading the charge. Tesla Tesla's stock price kept going up. Tesla has become just the fifth company to reach a trillion dollar valuation. The massive valuation happened after Tesla's stock price hit an all time high of more than $1,000. So this company that had just a few years earlier, been on the brink of failure, looking to China for a lifeline, was suddenly riding high. Tesla is now the most valuable car company in the world.

It's worth more than General Motors, Ford, Fiat, By the summer, it had become the most valuable car company in the world.

Guess what? Elon Musk is now the world's richest fan. Forbes says he's worth more than $255 billion. Elon Musk's wealth is tied up in Tesla stock. In the following year, he became the wealthiest man in the world.

You have this emission trading system, which we discussed and which in part thanks to Tesla, is now established in China. It's bringing in money to Tesla. Now this Shanghai factory is continuing to produce cars for the Tesla in the middle of the pandemic. China really paid off for Tesla. But What was in it for China?

Well, China wasn't doing this for charity. What Chinese leaders really wanted was to turn their fledgling electric vehicle industry into a global powerhouse. They figured that Tesla was the ticket to get there. That's precisely what happened.

We'll be right back. Mara, you've just told us the story of how Elon Musk used China to turn Tesla into the biggest carmaker in the world, and himself, at one point, into the richest man in the world. Now, I want to understand the other side of this story. How did China use Tesla?

Well, Tesla basically became a catfish for China's EV industry.

A catfish? What do you mean by that?

It's a term from the business world. Essentially, it means a super aggressive fish that makes the other fish in the pond swim faster. And by bringing in this super competitive, aggressive, foreign company into China, which at that point had these fledgling EV companies, Chinese leaders hoped to spur the upstart Chinese EV makers to up their game.

So you're saying that at this point, China actually already had a number of smaller EV companies, which many people in the West may not even been aware of, like these smaller fish in the pond that you were referring to?

Yes, there were a lot of them. They were often locally based. One would be strong in one city and one would be strong in another city. Chinese leaders saw that they needed to become more competitive in order to thrive. China had tried for decades to build up this traditional car industry by bringing in foreign companies to set up joint ventures. They had really had their sight set on building a strong car industry, and it didn't really work. I mean, how many traditional Chinese car company brands can you name?

Exactly none.

Yeah, right. So going back to the '80s and the 2010s, they had this advantage that many Chinese hadn't yet been hooked on gas-guzzling cars. There were still many people who were buying their first car ever. So officials had all these levers they could pull to try to encourage or try to push people's behavior in a certain direction. And their idea was to try to ensure that when people went to buy their first car, it would be an EV, and not just an EV, but hopefully a Chinese EV. They did things like, at the time, just a license plate for your car could cost an exorbitant amount of money and be difficult to get. They made license plates for electric vehicles free. There were all these preferential policies that were unveiled to nudge people toward buying EVs.

That's fascinating. China is incentivizing consumers to buy EV cars and incentivizing also the whole industry to get its act together by chucking this big American company in the mix and hoping that it will increase competitiveness. What I'm particularly struck by, Mara, in what you said is the concept of leapfrogging over the conventional combustion engine phase, which took us decades to live through. We're still living in it in many ways in the West. But listening to you, it sounds a little bit like China wasn't really thinking about this transition to EVs as an environmental policy. It sounds like they were doing this more from an industrial policy perspective.

Right. The environment and the horrible air at the time was a factor, but it was a pretty minor factor, according to people who were privy to the policy discussions. The more significant factor was industrial policy and an interest in building up a competitive sphere.

China now wants to become a leader in the global EV sector, and it wants to use Tesla to get there. What does that actually look like?

Well, you need They had sophisticated suppliers to make the component parts of electric vehicles. Just by being in China, Tesla helped spur the development of several suppliers. For example, the battery is a crucial piece of any EV. Tesla, with a fair amount of encouragement and also various levers from the Chinese government, became a customer of a battery maker called CATL, a homegrown Chinese battery maker. They have become very close to Tesla and have even set up a factory near Tesla's in Shanghai. Today, with Tesla's business, and of course, with the business of some other companies, CATL is the biggest battery maker in the world. Wow. But beyond just stimulating the growth of suppliers, Tesla also made these other fish in the pond swim faster. And the biggest Chinese EV company to come out of that period is the one called BYD. It's short for build your dreams.

We are a BYD. You've probably never heard of us. From battery maker to the biggest electric vehicle or EV manufacturer in China.

They've got a lot of models, they've got a lot of discounts, they've got a lot of market growth. China's biggest EV maker just overtook Tesla in terms of worldwide sales. Byd 10. Chinese automobile redefined.

I've actually started seeing that brand on the streets here in Europe recently, especially in Germany, where my brother actually used to lease a Tesla and now leases a BYD.

Does he like it?

He does, although he did, to be fair, say that he misses the luxury of the Tesla, but it just became too expensive, really.

The price point is a huge reason that BYD is increasingly giving Tesla a run for its money. Years ago, back in 2011- Although there's competitors now ramping up, and as you're familiar with BYD, which is also on the- Elon Musk actually mocked their cars. Here he is, trying to compete.

Why do you laugh?

He asked an interviewer. Have you seen their car? I have seen their car, yes. Have you seen their cars? Sort of suggesting like, there are no competition for us. You don't see them at as a competitor? No. Why is that? I mean, they offer a lower price point. I don't think they have a great product. I think their focus is, and rightly should be, on making sure they don't die in China. But they have been steadily improving. They've been in the EV space for a while, but they really started improving a few years ago once Tesla came on the scene. That was due to a number of factors, not entirely because of Tesla, but Tesla played a role in helping train up talent in China. One former Tesla employee who worked at the company as they were getting set up in China told me that most of the employees who were at the company at the time now work for Chinese competitors. They have really played this important role in the EV ecosystem.

You mentioned the price advantage. Just for comparison, what does an average BYD sell for compared to a more affordable Tesla car.

So BYD has an ultra-cheap model called the Seagull that sells for around $10,000 now in China. Whereas Tesla Model 3s and Model Ys in China sell for more than twice that.

Wow. How is BYD able to sell EVs at these much lower prices?

Well, the Seagl is really just a simpler car. It has less than a Tesla. It lacks some safety measures. But BYD has this other crucial advantage, which is that they're vertically integrated. They control many aspects of the supply chain, up and down the supply chain. When you look at the battery level, they make batteries, but they even own the mines where lithium is mined for the batteries. They recently launched a fleet of ships. They actually operate the boats that are sending their cars to Europe or other parts of the world.

So BYD is basically cutting out the middleman on all these aspects of the supply chain, and that's how they can undercut other car makers on price.

Yeah. They've cut out the middleman, and they've cut out the middleman, and they've cut out the shipping company, and almost everything else.

So how is BYD doing now as a company compared to Tesla?

In terms of market cap, they're still much smaller than Tesla. But crucially, they overtook Tesla in sales in the last quarter of last year.

Wow.

Yeah, that was a huge milestone. Tesla still dominates in the European market, which is a very important market for EVs. But BYD is starting to export there. Europe is traditionally as automotive powerhouse, and the companies and government officials there are very, very concerned. I interviewed the French finance minister, and he told me that China has a 5-7 year head start on Europe when it comes to EVs.

Wow. And what has Elon Musk said about this incredible rise of BYD in recent years? Do you think he anticipated that Tesla's entry into the Chinese market could end up building up its own competition?

Well, I can't get inside his head, and he did not respond to our questions. The Chinese car companies are the most competitive car companies in the world. He has certainly changed his tune. Remember, he was joking about BYD some years ago. Yes. Yeah, he's not joking anymore. I think they will have significant success. He had dismissed Chinese EV makers, he now appears increasingly concerned about these new competitors.

Frankly, if there are not trade barriers established, they will pretty much demolish most other call companies in the world.

To the point that on an earnings call in January, he all but endorsed the use of trade barriers against them. They're extremely good.

I think it's so interesting in a way, of course, with perfect hindsight, the maybe complacency or naiveté with which he may not have emancipated this turn of events. And in some ways, he's not alone, right? It speaks to something larger. China, for a long time, was seen as the sweatshop or the manufacturer of the world, or perhaps as an export market for a lot of these Western companies. It certainly wasn't putting out its own big brand names. It was making stuff for the brand names. But recently, they have got a lot of their own brand names. Everybody talks about TikTok, there's Huawei, there's WeChat, Lenovo, and now there is BYD. China is becoming a leader in technology in certain areas. I think that shift in some ways has happened, and a lot of Western companies, perhaps like Tesla, were late to waking up to that.

Right. Tesla is looking fragile now. Their stock price dropped 30% in the first quarter of this year. And to a large degree, that is because of the threat of companies like BYD from China. And the perception that Tesla's position as number one in the market is no longer guaranteed.

Mara, all this raises a much bigger question for me, which is, who is going to own the future of EVs? Based on everything you've said so far, it seems like China owns the future of EVs. Is that right?

Well, possibly, but the jury is still out. Tesla is still far bigger for now, but there is this increasing fear that China owns the future of EVs. If you look at the US, there are already 25% tariffs on EVs from China. There's talk of increasing them. The Commerce Department recently launched an investigation into data collection by electric vehicles from China. All of these factors are creating uncertainty around what could happen. And the European Union may also add new tariffs against Chinese-made cars. China is an economic rival and a security rival, and in many ways, our main adversary. So this whole issue is intertwined with national security, and Tesla is really in the middle of it.

Right. So the new Cold War that people are talking about between the US and China is, in a sense, the backdrop to the story. But on one level, what we've been talking about is it's really a corporate story, an economic story that has this geopolitical backdrop, but it's also very much an environmental story. Regardless of how Elon Musk and Tesla fare in the end, is BYD's rise and its ability to create high quality and perhaps more importantly, affordable EVs, ultimately a good thing for the world?

If I think back on those years I spent living in Shanghai and Beijing when it was extremely polluted and there were days when you couldn't go outside, I don't think anyone wants to go back to that. It's clear that EVs are the future and that they're crucial to the green energy transition that we have to make. How exactly we get there is still unclear. But what is true is that China did just make that transition easier.

Mara, thank you so much.

Thank you, Katrin.

We'll be right back. Here's what else you need to know today. Oh, my God. Millions of people across North America were waiting for their turn to experience a rare event on Monday. From Mexico, to Texas. Awesome. Yes, awesome. We can see the Corona really well. Oh, you can see? Illinois. We are falling into darkness right now. What an incredible sensation.

And you are hearing and seeing the crowd of 15,000 gathered here at Sun.

Including Daily producers in New York.

It's like the sky is almost like a deep blue under the clouds. Oh, my God. The sun is disappearing and it's gone. Oh, whoa.

All the way up to Canada.

Yeah, that's what I'm talking about.

That's what I see. The moon glided in front of the sun and obscured it entirely in a total solar eclipse, momentarily plunging the day into darkness.

It's super exciting. It's so amazing to see science in action like this.

Today's episode was produced by Ricky Nowetsky and Mujdj Zady, with help from Rochelle Bonja. It was edited by Lisa Chou, with help from Alexandra Lee Young. Fact-checked by Susan Lee. Contains original music by Marion Lozano, Diane Wong, Alicia by ETOUP, and Sophia Lanman. And was engineered by Chris Wood. Our theme music is by Jim Brandberg and Ben Lansberg of WNDYLE. That's it for The Daily. I'm Katrin Benhold. See you tomorrow.