Tesla’s China Game

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Before the recent pandemic and stock-market turmoil, Tesla made remarkable gains in China’s huge EV market

Quick take:

  • After taking the US electric vehicle market by storm, Tesla set its sights on tackling the competitive Chinese EV market—the world’s largest, driven by government supports and incentives.
  • As of the first four months of 2022, Tesla sold the third-most electric vehicles in China and was the only foreign company to place models on the list of the country’s top 10 EV vehicles sold.
  • Regardless of the recent market and pandemic turmoil—not to mention CEO Elon Musk’s personal antics—Tesla is likely to continue expanding its reach in the Chinese EV market over the long term.
Thre Tesla cars in front of a traditional Chinese building.
Tesla vehicles parked outside the Chinese Communist Party's Beijing leadership compound in January 2018, as Tesla CEO Elon Musk and Chinese Premier Li Keqiang met inside. Photo: Mark Schiefelbein/Getty Images)

HONOLULU (June 2, 2022) -- It has not been a great spring for Tesla. As the American electric vehicle manufacturer’s stock led the recent market nosedive and its provocative CEO Elon Musk obsessed over his bid to buy Twitter, his beefs with the Biden administration and an allegation of misconduct by a private jet flight attendant, Tesla’s factory in Shanghai struggled to maintain production amid the city’s strict COVID lockdowns and cooling demand from a wary Chinese public.

The tumble has been a sharp reversal, if likely only a temporary one, of the company’s fortunes in China. After taking the US electric vehicle market by storm, the company had set its sights on tackling the competitive Chinese EV market, with impressive results. Just last year, the official Global Times newspaper reported that China had become Tesla’s fastest-growing market. Sales in China were largely credited with helping the company turn its first overall profit in 2020.

“Not satisfied with dominating the US market, the company turned to China to expand its vehicle sales,” scholar Eric Harwit writes in a recent East-West Center AsiaPacific Issues paper, Tesla Goes to China. The paper explores Tesla’s expansion into the Chinese market over the last eight years and the various successes and struggles it has faced adapting to China’s playbook.

“The interest in China came naturally, because China’s overall vehicle market has been larger than that of the United States since 2008,” Harwit writes. China now also boasts the world’s largest EV market, driven by government financial support and consumer incentives. Notably, China’s government is aiming to have EVs make up 40 percent of all vehicle sales by 2030.

Government incentives
Since 2009, the Chinese government has offered incentives for manufacturers and consumers of electric vehicles, creating an attractive marketplace for EV producers. One such subsidy, according to Harwit, provided taxi fleets and local government agencies with up to $8,800 for each hybrid or EV purchased, expanding to include consumers in 2010. The following year, the government made pure-electric, fuel-cell, and plug-in hybrid vehicles exempt from its annual vehicle tax.

Charging stations were also set up by the state electric utility across major cities like Beijing, Shanghai, and Tianjin. By 2019, there were 1.2 million charging stations in place, with plans to build 600,000 more.

As of 2021, Harwit writes, pure-electric vehicles with a minimum driving range of 300 kilometers received a subsidy of up to $3,500, while a plug-in hybrid could receive a subsidy of about $1,300. License-plate fees, set up by China to limit the number of cars on already-congested roads, were also waived for plug-ins. And in 2015, EV buyers in Beijing were given exemptions from rules that restrict driving on city roads during rush hours.

Chinese manufacturers given upper hand
Most of China’s leading domestic EV manufacturers are either state-owned enterprises or private companies, though the top-selling electric car—the $4,500 Wuling Hongguang Mini EV—is a joint venture between a state-owned and foreign firm. This deviates slightly from China’s conventional gas-powered car market, which has long been dominated by private joint ventures with foreign car companies like Volkswagen, General Motors, and Toyota.

According to data cited by Harwit, Tesla, which does not operate as a joint venture, saw its Model 3 rank as the second-best-selling electric vehicle in China in April 2021 and was the only foreign company to make the list of the country’s top 15 EV vehicles sold at the time. “Chinese government rules mandate that new foreign EV factories need a minimum production capacity of 100,000 electric passenger cars or 5,000 electric commercial vehicles,” Harwit notes, “thereby presenting a high investment hurdle for new foreign entrants.”

Gaining trust
Tesla began selling vehicles in China in 2014 but faced several hurdles before hitting its stride. “Through 2015, vehicle delivery delays and negative perception of charging options led to poor sales,” Harwit explains. A 25 percent tariff on imported vehicles also added to the cost of the car, making it less affordable than locally sourced options. (As of this past March, the cheapest Tesla model sold for about $49,900 in China.)

Soon, Tesla installed thousands of EV chargers to address concerns. By 2016, the company reported that it had delivered 11,000 vehicles and saw over $1 billion in revenue in China—accounting for more than 15 percent of Tesla’s total annual revenue. The following year, the car manufacturer announced that it would build a factory in Shanghai in order to increase its sales volume, ultimately establishing a facility in Shanghai’s Free Trade Zone in order to avoid finding a joint-venture partner and to better protect its intellectual property.

In 2017, Tesla announced that it had sold a 5 percent stake in the company to Chinese Internet giant Tencent Holdings for $1.8 billion, a move that symbolized its ongoing connection to the Chinese market. It was able to open its first “Gigafactory” in Shanghai in 2019 to make batteries and cars, and by 2020 it produced 140,000 Model 3 vehicles there.

In 2021, it doubled its factory size to produce Model Y cars, leading to record sales for Tesla Shanghai and more cost-competitive vehicles. And by the end of the year, Tesla’s production in China represented roughly half of its 936,000 vehicles delivered globally.

In addition, the company began producing charging stations at its dedicated Supercharger factory in Shanghai, adding about 7,000 Supercharger stalls in China by last August. It also completed its “Silk Road” Supercharger route in June, making long-distance travel from east to west in China more accessible.

Continued growth likely
Notwithstanding all the recent economic and pandemic turmoil—not to mention Musk’s personal antics—Tesla is likely to continue expanding its reach in the Chinese EV market over the long term. However, it may soon face another kind of challenge, Harwit writes: The Chinese government has said that it would cut subsidies on new energy vehicles by 30 percent this year, before eliminating them completely at the end of the year.

Still, provincial and municipal governments have continued to subsidize up to 30 percent of charging station installation costs. “In addition to the prestige Chinese consumers receive by purchasing the American vehicle,” Harwit concludes, “the manufacturing capacity and supporting infrastructure Tesla has created in China should put it in good stead with both the nation’s citizenry and the Chinese government.”