China bans Teslas for military members, employees of state-owned companies

Ban comes amid heightened tensions between the US and China

China has banned the country's military members and employees of government-owned companies from purchasing Tesla vehicles, according to new reports.

The ban comes amid heightened tensions between the U.S. and China and the security concerns that accompany technology products the two countries buy and sell to each other.

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Chinese officials are concerned about potential data-collection through camera technology in Tesla vehicles that could lead to national intelligence leaks after a review, people familiar with the matter told The Wall Street Journal.

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"China led a security review of Tesla's EVs and reportedly found that Tesla's sensors could record image [sic] of their surrounding locations," according to Dan Ives and Strecker Backe, analysts Wedbush Securities.

Shanghai, China - August 1, 2020: Exterior view of automobile plant Tesla Gigafactory 3 located in Pudong District, Shanghai, China.

They said that while China's findings are "consistent with Tesla's footprint...fears around location monitoring and surveillance with Tesla being a U.S. company clearly sent some fears up the chain in the Chinese government and military that led to this action out of left field."

After receiving permission from China to build a factory in 2018, the Shanghai Gigafactory began operations at the end of 2019. The factory increased Tesla's production in China by more than 20%, helping the company lower manufacturing costs. Unlike other companies based in the country that are required to have Chinese partners to operate, Tesla is the sole owner and operator of the facility.

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The Chinese Communist Party has reportedly asked the country's military and certain agencies to tell their members and employees not to purchase Teslas, the Journal reported, citing those familiar with the move.

Demand for Tesla's electric vehicles is skyrocketing in the country, according to Ives and Backe, and the move by China may represent a show of authority.

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"Tesla's massive Giga footprint remains a major strategic advantage vs. other EV players (domestic and foreign) as we believe Tesla has potential to be on a [300,000] run rate of demand in China by the second half of this year," the analysts wrote.

The U.S. has similarly cracked down on Chinese technology, such as Huawei and TikTok parent company ByteDance, in recent years over surveillance and security concerns.