By Eamon Barrett
February 26, 2019

Tesla and Dyson, two soon-to-be-competitors in the crowded electric vehicle market, are breaking ground in Asia—literally. In a muddy riverside field on the outskirts of Shanghai workers, journalists, and government officials turned out in the rain last month to witness the ground breaking of Tesla’s first overseas factory. Meanwhile at an undisclosed location in Singapore’s tropical climes, Dyson is building a factory that will produce the British vacuum maker’s first-ever electric vehicle (EV).

At a glance, Dyson’s choice of location for its debut EV plant is strange. Singapore is one of the most expensive places to own a car and the government’s Land Transport Authority, which issues permits for car ownership, is targeting 0% growth in car ownership levels. There won’t be a strong local market for Dyson’s electric vehicles (EVs) as they roll off the production line and into the city-state.

Labor costs are higher in Singapore than in neighboring countries, such as China, too. According to data from Singapore’s Ministry of Manpower, the average monthly wage for an assembler of electronic equipment was S$2,090 ($1,548) in 2017. Meanwhile in China, the Ministry of Labor reports the average monthly salary for the same job was Rmb5,645 ($840).

For Tesla, cheaper labor is just one of the more obvious upsides to manufacturing in China, the world’s largest market for EVs. Tesla currently produces all of its cars in the U.S., which leaves the vehicles subject to a hefty levy when imported to China. Before the trade war began last summer, the tariff rate on auto imports was 25%. Factoring in the cost of shipping, Tesla estimated it was operating at a 60% cost disadvantage to locally produced cars.

“We all know Tesla has been having some sort of trouble for the last two years in terms of profits and cash flow, and the U.S. market for growth has slowed down,” says Ray Tsang, a partner in the Shanghai offices of Bain & Company consultants. “Expanding into the global market is important and China is a major player. Tesla had to find a business model that was better than just importing.”

In the company’s latest earnings reports Tesla noted, while referring to the construction of its Gigafactory site in Shanghai, that “local manufacturing is an essential component of our ability to provide to customers in the region a truly affordable version of Model 3.” But manufacturing in China wasn’t appealing for the high-tech automaker until last year.

Since 1994, Beijing has required foreign auto manufacturers to form joint ventures with local firms in order to produce vehicles in China. This meant foreign firms had to share technology with local rivals. Only last year Beijing announced it would scrap the decades-old restrictions by 2022 or even sooner for EV manufacturers. Tesla will be the first foreign car company to open a wholly-owned factory on Chinese soil.

There’s no official word on whether Tesla received subsidies or tax incentives to open its $5 billion Gigafactory in Shanghai, but China is making the company feel welcome. The day after breaking ground at the Gigafactory’s site in Shanghai, Tesla CEO Elon Musk met China Premier Li Keqiang. When Musk said he loved China, Li offered the radical entrepreneur a coveted Chinese green card. “We hope you can get a firm foothold and expand the market,” Li told Musk.

 

Power move

With its Shanghai plant, Tesla will have greater access to China’s rich automotive ecosystem, allowing the car company to diversify its suppliers. Currently, Panasonic is Tesla’s sole supplier of battery cells, which the auto company uses to build battery packs. The battery is one of the most expensive components of an EV, and Tesla CEO Elon Musk has said his company is investigating alternative suppliers for its new Shanghai factory.

In January, Reuters reported Tesla had signed a preliminary agreement with Tianjin Lishen Battery, a state-owned firm that produces lithium-ion batteries in a factory roughly an hour’s drive from Tesla’s new Shanghai location. Tesla denied it had signed any agreements, but said it had received quotes.

Dale Hardcastle, a partner in Bain & Company’s Singapore office, thinks Dyson will rely on its own battery pack to differentiate itself from the rest of the market. Most EV manufacturers, like Tesla, use lithium-ion batteries, where solid lithium electrodes are immersed in an electrolyte solution. Hardcastle suspects Dyson will opt for a “solid-state” battery instead.

“The majority of the cost in EVS is still the integrated battery pack,” Hardcastle says. “Tesla of course sees there’s a way to bring down the cost by improving lithium-ion batteries in the long run, but Dyson thinks there’s potential to make the shift much faster with solid-state cells.”

A solid-state battery replaces the liquid electrolyte of a conventional battery with a solid conductor, such as metal or glass. Theoretically a solid-state battery could store more energy, charge faster, and last longer than the lithium-ion standard. It is also safer, because the solid conductor doesn’t heat up like an electrolyte. But finding a solid-state material fit for purpose isn’t easy.

Dyson has pledged £2.5 billion ($3.22 billion) to its EV project, of which £1 billion is dedicated solely to developing the battery pack. In 2015, Dyson bought Michigan-based solid-state battery developer Sakti3 for $90 million (£58 million), after making an initial $15 million investment in the company seven months earlier. But, in April 2017, Dyson dumped the patents it had acquired from Sakti3 and then wrote off £49 million of its investment in the company last September, prompting speculation the company was abandoning its solid-state scheme.

However, a month before writing off its investment, Dyson filed a patent of its own for a technology that, according to the filing, “provides a simple, fast and low-cost way of producing a solid-state cell.” In an interview last year, Dyson claimed his company has two solid-state batteries in development—potentially one for use in its vacuums and one for its new car. The company didn’t respond to Fortune’s request for comment on whether its EV would use a solid-state battery.

Dyson claims it already produces 100 million battery cells annually but, according to Hardcastle, the company is “quite secretive” about where those batteries are manufactured. Dyson previously said its EV would be manufactured wherever its battery is made, which suggests the company’s batteries are made in Singapore.

 

The big break

Dyson has been consolidating its business around Singapore for years. The company employs over 1,100 staff in the city, including CEO Jim Rowan. The firm opened a new research center in Singapore’s Science Park in 2017 and moved its HQ to the city last month. The electric motors that power Dyson’s vacuum cleaners have been manufactured in Singapore since 2013 and the company has another production site in the Philippines and its primary manufacturing center in Malaysia. The iconic British brand hasn’t manufactured within the U.K. since 2003

According to Nitin Pangakar, the academic director of the National University of Singapore’s MBA program, Singapore is keen to build its image as a high-end manufacturer and Dyson’s car plant fits well with that plan—so well, Pangakar suspects Singapore enticed Dyson to the city by offering tax breaks and, maybe, a cheap deal on land.

“I think incentivizing Dyson would be very enlightened,’ Pangakar says. “Taxes are just one way a government can benefit from welcoming a new company, while job creation and other multiplier effects are very important too. Plus, if Dyson doesn’t come here then Singapore gets nothing anyway.”

The local government has used tax breaks to entice investment before and doing so is a common practice worldwide—consider the bidding war Amazon sparked for the location of its HQ2 in New York (before that deal soured) or the $3 billion subsidy scheme Wisconsin laid out to attract Taiwanese manufacturer Foxconn last year.

Dyson hasn’t said whether it received any financial incentives to open its factory in Singapore. Singaporean officials have declined to comment too. In remarks emailed to Fortune, Assistant Managing Director at the Singapore Economic Development Board, Kiren Kumar, detailed Singapore’s various attractive qualities, but didn’t mention taxes.

“Over the past decade, Singapore’s manufacturing sector has been steadily transformed into one that competes based on the deep skills of our workforce, the use of advanced technologies such as robotics and automation, and a strong ecosystem of suppliers locally and in the region,” Kumar said.

Dyson CEO Jim Rowan has adopted a similar line, touting Singapore’s access to an “extensive supply chain” and its “highly skilled workforce” as reasons why Dyson chose the city as the site for its auto plant, rather than China or the U.K., which were also under consideration.

But Singapore lacks any significant automotive industry. Dyson will need to import components and establish a brand-new auto supply chain, which will be a significant cost in the short term and a challenge to achieve by 2020, when Dyson expects to produce its first vehicle. A factory in China would have greater access to automotive supply chains, but Rowan highlighted Singapore’s “access to markets” as the third reason why the tiny semi-enclave was selected.

Singapore has longstanding free trade agreements with the U.S. and China and, last October, Singapore signed one with the E.U. that will gradually eliminate tariffs on auto imports. From Singapore, Dyson will have greater access to the world’s largest EV markets while keeping safe from unpredictable Sino-U.S. relations and the perils of Brexit.

Putting distance between itself and China could help Dyson safeguard its trade secrets against China’s notoriously lax enforcement of intellectual property rights too. In a letter to employees last year, James Dyson wrote, “Competition for new technology in the automotive industry is fierce and we must do everything we can to keep the specifics of our vehicle confidential.”

The Dyson founder estimated in 2011 that one third of his company’s costs go into research and development. He said, the company “can’t be the low-end producer.” Case in point: the company’s $400 hair dryer. But the high R&D cost can only be justified if it yields Dyson a product no one else can produce.

So far, the company has kept most of the details regarding its new EV secret but some elements have leaked. Dyson himself suggested that traditional windscreen wipers, which “brush the muck back and forth,” could be replaced by Dyson Airblade technology – the kind that powers its hand dryers. The 360-degree camera from the company’s autonomous vacuum cleaner could find a home in the car too. Tesla, meanwhile, has fewer secrets to keep and establishing a presence in China could help it stay abreast of developments in the industry.

“The two companies are coming at the market from different stages of development,” says Hardcastle. “Tesla is looking to make what it already has cheaper, while Dyson is trying to introduce something completely new.” Whether Dyson can mitigate the risks of trying something new while simultaneously reviving Singapore’s auto manufacturing industry remains to be seen. But, if Dyson succeeds, Tesla could find itself challenged by its unlikeliest rival yet.

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