How a Trump victory would threaten Tesla’s success in China

That connection will be tested if Donald Trump is elected to a second term in the White House and a bigger trade war breaks out.

Chief Executive Elon Musk’s embrace of the Republican might put little daylight between him and a second Trump administration in Beijing’s eyes, according to China experts.

It isn’t hard to see why Chinese officials might conclude the two men are united, especially as Musk is not just spending money to help get Trump re-elected but is campaigning for him across Pennsylvania. In turn, Trump, who has taken to mentioning Musk routinely by name during campaign events, has said he would appoint him to an efficiency commission aimed at reducing the government.

“The Chinese government, I think, are looking at that close relationship as a good thing and…Elon could be seen as an extension of the Trump administration and ultimately something that can help the Chinese government soften the U.S. stance on EVs and technology," Tu Le, founder of the consulting firm Sino Auto Insights, told me in an email.

The importance of Tesla’s China business was on display this past week, when the electric-car maker reported third-quarter results, showing revenue from the country rising 13% from a year earlier. China is Tesla’s biggest market outside the U.S. and is home to its most productive factory, capable of making around one million vehicles a year.

“China continues to outperform U.S. and Europe," Chief Financial Officer Vaibhav Taneja told analysts Thursday about the electric-vehicle industry. “And if there is something to be learned from that, this gives a signal of what is to come in other regions: As customers’ acceptance of EV grows, we feel that is the right strategy to build affordable and more compelling leads."

The company’s Shanghai-area factory, which began production in 2019, changed the trajectory of Tesla, fueling dramatic expansion that has helped make it the world’s most valuable automaker. That giant factory’s construction required unprecedented access by government leaders, who were eager to welcome the world’s leading EV maker as China pushed to develop its own, homegrown EV industry.

Tesla became the first foreign automaker allowed to fully control its own factory in the country, while the likes of Volkswagen and General Motors had to form joint ventures with local partners in exchange for access to the fast-growing market.

Since then, nascent local rivals have become fierce competitors, threatening Tesla’s position.

All the while, Musk, walking an apparent tight rope, has been deferential to China. An example of this behavior includes his visit to the country during heightened tensions last year and his telling officials in Beijing that he opposed decoupling the world’s two biggest economies.

“It is very interesting to visit China in general and see the perceptions because…as much as, say, people in the U.S. might distrust China, likewise people in China in the government distrust America," he said after the trip. “What tends to mitigate that distrust…are really conversations, especially in-person conversations."

Trump’s relationship with China is less diplomatic.

His administration sought to bolster U.S. factory production by making Chinese imports more expensive with tariffs, leading to a sharp decline of imports. If he returns to the White House, Trump has said he would raise tariffs on Chinese imports to 60% or more—potentially coming at an inopportune time for China’s wobbly economy.

In the midst of escalating rhetoric, Chinese leaders in Beijing are “trying to figure out if there’s a possible counterweight, with top Chinese leaders talking about Elon Musk’s role in a Trump administration," Ian Bremmer, founder of the New York-based consulting firm Eurasia Group, wrote recently in his newsletter.

It didn’t go unnoticed in Beijing, Bremmer noted, that after Musk met with Chinese Premier Li Qiang in April, Trump mentioned at the Republican National Convention the idea of allowing Chinese EV makers to build vehicles in the U.S. The former president has also reversed his opposition to a TikTok ban.

“Elon’s decision to align himself with Trump has essentially hitched his future in China on whether or not he can deliver politically," Bremmer concluded.

Michael Dunne, a longtime China automotive industry consultant, said he sees some potential upside for Musk in a scenario under which his close alignment allows for deals that benefit all three parties.

“The Chinese see Trump as a man who loves to make a deal," Dunne, chief executive of Dunne Insights, said. “I think that would play well" for Musk, he said.

Dunne added: “China and Tesla continue to do well in exporting from China and selling into the China market, and maybe there’s a deal to be struck where a Chinese manufacturer invests in Kansas and builds a brand-new plant, employs people, brings money."

Tesla’s operations have already been affected by the prospect of a new Trump administration’s trade barriers.

In July, Musk said plans for a new assembly plant in Mexico were on pause. “We need to see just where things stand after the election," Musk said. “Trump has said that he will put heavy tariffs on vehicles produced in Mexico so it doesn’t make sense to invest a lot in Mexico if that is going to be the case."

In recent weeks, Trump raised another idea that could benefit Musk when it comes to Chinese competition. At a rally ahead of Tesla’s revealing of its Robotaxi, the Republican suggested he would prevent Chinese-made driverless cars from operating on U.S. roads.

“I will continue my first-term efforts to protect America from the threat of Chinese automobiles," he said at an event in Detroit.

For his part, Musk in May criticized U.S. tariffs on Chinese EVs introduced that month by the Biden administration. “In general, I am in favor of no tariffs," Musk told participants at an event in Paris.

Still, on the campaign trail in Pennsylvania this month, Musk has touted his support for Trump with language that might not appeal to the leaders in China.

“This really is a pivotal election, super big deal," Musk told a crowd. “It’s really the difference between freedom and opportunity or oppression and…communism."

Write to Tim Higgins at tim.higgins@wsj.com