Tesla is more upbeat about its China prospects as the preorders of Model 3 come in. But the company still faces an uphill battle in winning over the country’s mass consumers.
Ren Yuxiang, Tesla’s head for Asia Pacific, said in April at industry conference GMIC Beijing that he is seeing a “considerable” amount of Model 3 preorders from China, which makes the country the second largest market for the vehicle after the United States. Ren, who didn’t disclose the exact amount of China reservations during his speech and didn’t take inquiries afterwards, also said preorders for the low-cost unit, which sells for $35,000 as compared to the $71,500 Model S and the $83,000 Model X, reached almost 400,000 globally as of March 31.
The optimistic outlook is a sharp contrast to what Tesla went through over the last two years in China. Sales have been disappointing as the vehicles’ high price tags, combined with a lack of charging infrastructure, deterred many from buying. The Model S starts at $106,000 in the country due to high shipping costs and steep import taxes. Founder Elon Musk was forced to lower sales target from 10,000 in 2014 to 5,000 this year as the company’s China unit went through a layoff last year.
In the first three quarters of 2015, Tesla sold 3,025 vehicles in mainland China,and the majority of them went to urban elites like
“Tesla has this aura of a tech superstar,” says John Zeng, general manager of Shanghai-based consultancy LMC Automotive. “A lot of rich Chinese people would like to try it. For them it is just a toy.”
Although the Model 3 preorders could suggest a widening appeal as more consumers are convinced to switch to electric cars, Tesla will also encounter some reality checks, says Pilar Dieter, a Shanghai-based partner at corporate strategy consulting form Solidiance.
The company, which has a track record of not delivering on time, could struggle to scale up production to meet its China orders as it builds up a complex supply chain, she says.
Another problem is Tesla doesn’t offer its guaranteed buy-back program in mainland China, which lets people sell their Model S to the company at a minimum of 43% of the original purchasing price three years on. This, on top of charging facilities that are incompatible with the state grid, further drives consumers away.
“Preorder is really not the same as actual deliveries,” LMC’s Zeng says. “Chinese consumers are worried that their Tesla will not perform as well after four to five years. This is a great uncertainty for them.”
Price is also an issue. A $35,000 Model 3 is still too expensive for most Chinese users, says Yale Zhang, managing director of Shanghai-based AutoForesight. Last year electric-car sales reached 330,000 units in the country, and most people who purchased for personal uses paid no more than 100,000 yuan ($15,000) per car, according to Zhang. For them, an electric vehicle is simply a way to bypass China’s system of handing out license plates by drawing lotteries. Beijing implemented the mechanism in 2011 to reduce traffic jam and pollution, but a number of electric car models - including the Model S - are exempt as the government wants to increase sales.
That means the company’s future in China depends on whether it can manufacture locally, Zhang says. Musk, who pressed the Obama Administration last year to ask China to ease its auto industry rules on production joint ventures, has said manufacturing locally would help slash the prices of Tesla cars by a third, thanks to reduced taxes and shipping costs. China currently prohibits foreign automakers from assembling vehicles in the country without a local partner.
But a JV in China could also significantly increase operating costs due to management spending and raw material imports, Solidiance’s Dieter says. It remains to be seen whether Tesla can be profitable here, she says.
The company also has to compete with a number of well-funded Chinese auto makers when it starts to deliver the Model 3 in 2017. NextEV, backed by Chinese web giant
“There will be many more EVs in China,” Zhang says. “It is hard to say whether the Model 3 will stand out or not.”
