Tesla Seeks Smooth Permissions in China, Local Data Centres Says Elon Musk

Tesla is speeding up the development of its self-driving system in China with plans for a local data center, possibly increasing revenue amid competition from Chinese rivals.

Tesla is moving forward with plans to use data from China for the global development of its self-driving system. This data could be processed within China as part of a strategic shift by Elon Musk, according to sources familiar with the matter.

Tesla has been planning a data center in China to train the algorithm needed for more autonomous vehicles, according to two sources who requested anonymity because the work is still private.

Until recently, Tesla focused on getting approval from Chinese regulators to transfer data generated by its EVs in China out of the country for its "Full Self Driving" (FSD) system, according to the two sources and another person with knowledge of the matter.

It is unclear if Tesla will proceed with both data handling options—data transfer and a local data center—or if it is developing parallel plans as a precaution.

Tesla's efforts show the speed of its shift to bet on AI breakthroughs at a time when EV demand has slowed, and competition has increased. Using data from vehicles in China to develop its AI for driving comes as the U.S. government tries to limit AI technology transfer from U.S. firms to China.

Tesla has not been able to offer the full version of FSD, which costs nearly $9,000, in China. Expanding the FSD market in China could boost Tesla's revenue and profits at a time when they are under pressure from Chinese rivals like BYD.

Setting up a data center in China for FSD development would require Tesla to work with a Chinese partner, according to two sources. There is also a potential challenge in sourcing hardware.

Tesla has had talks with Nvidia about acquiring graphic processing units for a China data center, according to one source. U.S. sanctions prevent Nvidia and its partners from selling its most advanced chips in China. Nvidia declined to comment on whether it had held talks with Tesla.

Tesla’s move to use more data from China was intensified by Musk's recent trip to Beijing, where he met with officials including Premier Li Qiang. During his meeting with Li, Musk sought to smooth permissions for Tesla's data transfer, and the idea of Tesla investing in a data center in China was also discussed.

Musk also talked about the possibility of licensing Tesla's FSD systems to Chinese EV makers, according to one person. In April, Musk mentioned Tesla was discussing licensing FSD with another "major" automaker without naming it.

China, the world’s largest car market, has the biggest fleet of sensor-equipped cars that can collect data from busy cities with complex traffic patterns. This data is valuable for automakers and AI providers.

Musk had previously opposed a China-based data center, arguing that transferring data to the United States was the most efficient option, according to two sources. Since 2021, Tesla has stored data collected by its Chinese EVs in Shanghai. Over that time, Tesla's China team has been seeking approvals from Chinese regulators to transfer data out of the country, according to two sources.

Under a one-year pilot project, companies in Shanghai's Lingang Area, where Tesla's factory is located, will be allowed to transfer certain data without further security assessments, Reuters reported on Friday.

Some analysts see Musk as trying to make China a launchpad for self-driving, similar to how Tesla’s 2019 bet on its Shanghai Gigafactory allowed it to become a mass-market EV maker.

"It would definitely be a milestone for Tesla if it rolls out FSD in China and uses China data for algorithm training," said Yale Zhang, managing director at Shanghai-based consultancy Automotive Foresight.

"China played a key role in scaling up EV production for Tesla with the Shanghai factory. It would again be significant in scaling up mass adoption of autonomous driving technologies," he said.

Many industry experts think it will take years before fully autonomous cars are common, but predictions vary widely. Driver-assistance features now offered in China are "level two" systems, meaning they require a driver ready to take over. Tesla's FSD and its less advanced Autopilot are also level-two systems requiring attentive drivers.

More fully automated vehicle fleets operated by Baidu, China's biggest search engine operator, and Pony.ai, an autonomous driving startup, run in limited test zones.

China's EV makers, including BYD, have made self-driving and advanced driver assist systems a priority. Mercedes and BMW have been granted licenses to test level-three systems that allow drivers to take their hands off the wheel and look away on a wider range of roads in China.

At least five automakers—Hyundai, Mazda, Toyota, Volkswagen, and Nissan—have approval to transfer some of their data out of China. However, none of those approvals are for data used to train AI systems, according to lawyers, state media reports, and analysts.

Penalties for violating data privacy laws in China, which came into effect in 2021, are a major risk for data operations, according to groups representing foreign businesses in China.

When asked about competition from Chinese EV makers during a call with investors after Tesla’s quarterly earnings last month, Musk said Tesla should be seen more as an AI company. He said he was confident Tesla’s FSD system would work “pretty well without modification in almost any market.” It would work better with “country-specific” training, Musk said.