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Volkswagen To Subsidise Tesla’s China Operation By Purchasing Green Credits

A new report coming out of China states Volkswagen and its state-owned Chinese partner FAW have agreed to purchase green credits from Tesla.

According to a report by Reuters citing unnamed sources in China, Volkswagen has signed a deal with Tesla to purchase green credits from the EV maker. According to the deal, Volkswagen and its Chinese partner, state-owned automaker FAW, will pay Tesla 3000 yuan ($450) per green credit.

The total amount for the deal is not yet known however, given Tesla’s similar deals with other OEMs it wouldn’t be surprising if it ends up being in the hundreds of millions or even possibly more than a billion.

In a similar sort of deal Tesla signed with Fiat Chrysler (now Stellantins), Fiat Chrysler pays Tesla approximately a billion dollars a year to purchase green credits in Europe.

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As Tesla’s importance grows in the automotive world, large companies are increasingly choosing to work with the EV maker. Tesla’s deal with Volkswagen comes in a string of wins for the EV maker whereby competitors chose to directly pay Tesla. Just yesterday Apple announced it will be working with Tesla on one of the largest battery projects in the US.

Currently, China forces foreign automakers to find a local partner to manufacture internal combustion vehicles in the country. And for its Chinese operations, Volkswagen has chosen FAW and the two companies together produce almost 2 million vehicles in China.

Following the diesel gate scandal where Volkswagen installed cheat devices to trick emissions tests, the company has been increasingly shifting its future to electric vehicles. Volkswagen even came out with the ID.4 crossover costing $10,000 less than the Model Y and with some comparable features.

Volkswagen ID.4

Volkswagen has also said it will be coming out with 5 battery-electric vehicles for the Chinese market. At its Power Day Volkswagen also said it is planning to build six battery factories in Europe, each with a capacity of 40GWh.

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According to Volkswagen all of the factories will be operational by 2030, with the first one up and running by 2023. Investors of the German automaker also seem to be excited about the company’s plans. Following the company’s Power Day presentation Volkswagen’s stock price almost doubled in few days.

However, as admirable as Volkswagen’s future plans are its new deal with Tesla is a sign the company has a long way to go to achieve those goals. And until that day arrives Volkswagen will have to subsidize its biggest competitor.

Tesla Giga Berlin

The regulatory credit payment is a small part of Tesla’s overall revenue, it is especially dwarfed in size when compared to the amount of money Tesla makes from selling vehicles. For example, in 2020 Tesla earned $1.5 billion from selling regulatory credits but in the same year, Tesla made over $20 billion dollars selling cars.

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Still, it’s a nice income source for Tesla to fund its future growth. Especially considering the payment is almost all profit. Currently, Tesla is in various stages of building new factories or increasing production capacity in 3 continents. ARK Invest believes this will enable Tesla to produce 5 to 10 million vehicles a year by 2025.

This will surely require billions of dollars in new investment. However, a recently leaked document from Giga Texa shows the plant will only cost $400 million to build out.

So what do you think? Does Volkswagen paying for green credits make it harder for the German automaker to eventually catch up with Tesla? Also, how important do you think regulatory credits are for Tesla's future? Let me know your thoughts down in the comments below.

For more information check out: Elon Musk Says Tesla Could Be Bigger Than Apple - Here Is How Also, see When Enemies Unite: Who Wins in this Toyota / Tesla Joint Venture?

Tinsae Aregay has been following Tesla and The evolution of the EV space on a daily basis for several years. He covers everything about Tesla from the cars to Elon Musk, the energy business, and autonomy. Follow Tinsae on Twitter at @TinsaeAregay for daily Tesla news.