Can Tesla defend its dominant position in China’s EV market?
Updated: May 25, 2021
Tesla Inc. has enjoyed outstanding success during its first year selling China-made cars in the world’s largest electric-vehicle market, but analysts have warned that growing competition, spying concerns from Chinese officials and controversies over quality issues could threaten the company’s master plan in the country.
Tesla has found in China an unprecedented opportunity to fuel its global market growth. In 2020, the company recorded $6.7bn (£4.8bn) worth of sales there – twice that of 2019 and more than a fifth of its total revenue.
The Palo Alto, California-based Tesla has been leading monthly premium electric vehicle sales tallies in China, with its Model 3 becoming the country’s best-selling EV for much of 2020. According to the China Passenger Car Association, the automaker sold more than 135,000 vehicles there last year.
Wedbush Securities analyst Dan Ives said in a research note seen by Bloomberg that China could account for 40 per cent of Tesla’s sales by early 2022. “China could see eye-popping demand into 2021 and 2022 across the board with Tesla’s flagship giga 3 footprint a major competitive advantage,” he said, referring to the Shanghai plant launched in 2019.
The multimillion-dollar Shanghai gigafactory has been pivotal in ramping up production. Staggering stock numbers coming from the plant, which can reach 5,000 Model 3 cars a week according to the company, have helped push Tesla’s shares up almost 700 per cent since January 2020, making its CEO Elon Musk the second richest person on Earth.
“Tesla is, in the terms of the number of cars that it makes every year, still a lot smaller than most car companies, but its valuation is ridiculously high because of people's prognosis of where it could be in five or 10 years,” says Scott Kennedy, Senior Adviser and Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies.
In 2018, Tesla sealed an agreement with the Shanghai government that allowed the company to wholly own its domestic operations in China – becoming the first foreign carmaker to ever do so. Other unique perks the company extracted included tax breaks, cheap loans from state-backed banks and support for constructing an extensive industrial unit at an astounding speed.
Michael Dunne, head of the Chinese-focused automotive consultancy ZoZo Go, described Tesla’s establishment in the country as a ‘red carpet welcome’. “The Chinese government has seen the value of having Tesla and its suppliers planted inside China for their fortifying stance as the strongest EV industry in the world,” he told CNBC.
The Chinese government wants further expansion of its EV market to achieve its commitment to become carbon neutral by 2060. Its ambitious target is to transition to all-electric or hybrid cars by 2035, up from about 5 per cent currently.
However, growing US-China tensions and recent controversies have led some experts to wonder how long Tesla’s symbiotic relationship with Chinese officials could last.
“Foreign companies in China right now, particularly American companies, find themselves in a quandary,” says Kennedy. “The Chinese are hyper anxious about vulnerabilities that come from interdependence, so if US-China relations continue to head south, Tesla could be in a vulnerable situation.”
Chinese officials reportedly prohibited military staff and employees at sensitive state-owned corporations from driving Tesla’s cars last month, over worries that their data collection via sensors and video cameras could become a security threat. At the China Development Forum last March, Musk said that his company’s cars would never be used for spying.
“One has to come away with the conclusion that this is politically motivated,” Dunne told The Telegraph. “In my experience, this is a reminder to foreign companies that no matter how well you’re doing, don’t forget who’s in charge.”
In February, Tesla faced scrutiny from Chinese regulators over an unusual increase in customer complaints about quality issues. They urged the company to improve internal management, comply with Chinese law and regulations and protect consumers' rights.
Tesla Shanghai said it "sincerely accepted the guidance of government departments" and that it had "deeply reflected on shortcomings" in a statement.
Recent controversies seem to have done little damage to Tesla’s performance in China so far. According to the China Passenger Car Association, the company had by a long way the best month there, selling 35,478 locally built Model 3 and Model Y cars in March.
In the first quarter of 2021, Tesla sold 69,280 vehicles in China, which made up more than one-third of the automaker’s global Model 3 and Model Y sales during the period, the Association said. Tesla started delivering the made in China model Y in January.
At the end of last year, the trade group predicted total sales of 1.7 million new energy vehicles in the country for 2021, with 280,000 accounting for Tesla cars. Although that represents a 107.41 per cent increase from the year before, it still leaves more than 80 per cent of the market to a fast-growing set of domestic rivals.
“Tesla had the early-mover advantage and has shown the way to consumers,” Bill Russo, CEO of advisory firm Automobility Ltd. in Shanghai, told Bloomberg. “But now, there are more options.”
Chinese EV start-ups Li Auto, Nio and XPeng are gaining ground, with the three automakers also reporting record quarterly sales in China. In 2020, Nio and XPeng’s deliveries more than doubled to 43,728 and 27,041 vehicles respectively, while Li Auto sold 32,624 cars in its first 12 months. Still, their combined tally of 103,393 vehicles sold lags behind Tesla in terms of volume.
But Tesla and its Chinese competitors will soon need to confront a common challenge: traditional automakers rapidly transitioning to electric vehicles. General Motors, one of China’s biggest foreign automakers, recently announced it is planning to exclusively offer electric vehicles by 2035.
“On the one hand, competition is going to grow and pick up quite quickly, but on the other hand, demand for electric cars is going to expand,” Kennedy says. “I think Elon Musk could figure out a way in which Tesla does well even if you have a lot of local and foreign competitors in the Chinese market.”