Tesla has had a exciting week in China, one that included CEO Elon Musk’s dancing celebration of the first deliveries of Model 3 sedans produced in the company’s new Shanghai factory, as well as the announcement of plans to design an original car in China for sale worldwide.
The excitement extended to the company’s stock as well: Before slipping Thursday, Tesla shares rose almost 20% during a “meteoric” six-session winning streak.
The question now is whether Tesla can keep the momentum going.
Tesla has a strong brand reputation in China—the world’s largest market for electric vehicles (EVs)—and slashing prices on the new Shanghai-made Model 3 is already helping to boost sales.
But the company will have to navigate China’s fast-changing electric vehicle sector. Beijing has begun to contemplate a new round of cuts to its the country’s subsidy schemes, and the market, already host to a slew of domestic EV startups, will soon see the arrival of EV offerings from high-profile foreign automakers like BMW and Mercedes.
Morningstar forecasts EVs will grow to account for 35% of all auto sales in China by 2030.
Domestic competition
Tesla will inevitably face more competition in China in the near future, though analysts expect it to come less from the plethora of domestic brands already in the market than from automakers like BMW and Mercedes, which have plans to roll out their own EVs in China.
“I think Tesla will take a big chunk of the premium demand in the near-term,” says Ivan Su, a Hong Kong-based equity analyst at Morningstar. “I don’t think the domestic brands have that much of a standing in the premium space.”
Still, Su says it’s “definitely possible” for domestic brands to start to compete with Tesla in the premium EV space, though he doesn’t see it happening soon. He points to Chinese EV maker Nio as a possible contender for the high-end slice of the market, but Nio, once dubbed China’s Tesla, has been struggling with cashflow, and Su says its recent better-than-expected sales should not be taken as a positive sign until the firm releases profit figures.
“In the traditional gasoline vehicle space we’ve had so many domestic brands that are trying to challenge premium international brands, but none of them have really done it, and I don’t see why things will be different for electric vehicles.” Su says.
Foreign brands
As domestic brands compete with each other to differentiate themselves in the growing EV market, Su says, Tesla will face tougher competition at the high end from BMW and Mercedes once they roll out their EVs in China—though that may not happen for some time.
A recent change in ownership limits has made it easier for foreign brands to enter. The Chinese government lifted restrictions on foreign ownership for auto manufacturers in 2018. Previously, foreign carmakers could only produce and sell in China through joint ventures with Chinese companies.
The Tesla Gigafactory in Shanghai opened last year as China’s first wholly foreign-owned auto production plant since the government eased regulations, and the sedans delivered this week were Tesla’s first made-in-China cars to be shipped out to customers.
On Jan. 8, Mercedes-Benz and China’s Geely announced plans to produce electric Smart cars in China, and in November, BMW Group announced plans to build a Chinese plant to produce EV models of the Mini car brand in partnership with China’s Great Wall Motor. Construction is slated to begin this year.
For now, the image of China’s EV leader is Tesla’s to lose.
“Tesla still enjoys a quite positive image in China,” says Yuwan Hu, chief operating officer at Daxue Consulting, a China market research firm. Hu credits branding, and the social status that pricey cars bestow on auto-owners for Tesla’s popularity in China.
Founder Elon Musk is, of course, also a huge draw for the brand, due to his entrepreneurial backstory and, Hu says, even his reputation as “Silicon Valley’s Iron Man,” thanks to Marvel’s popularity in China.
Freeman Shen, CEO of Chinese EV startup WM Motor, told CNBC that Tesla’s presence in China is “a good thing” for local EV brands because it will encourage potential customers to consider electric vehicles as a whole. “Some of them will buy Tesla’s cars and some will buy WM’s cars. In EV market it is impossible that the winner take all.”
Su agrees with Shen’s assessment, saying that Tesla will spur more interest in electric vehicles for personal use, rather than the sector’s current reliance on commercial uses like ride-hailing and urban taxi fleets.
Su says “a big chunk” of sales for domestic brands like BYD has been for commercial purposes, as well as for people unable to obtain license plates in big cities like Shanghai and Shenzhen (EVs receive green license plates without restrictions on when cars can be driven, which conventional vehicles are subject to).
“What [Tesla] would bring is a premium offering—an attractive, original brand—to Chinese consumers that will open up a lot more household demand and a lot more premium demand going forward.” Su says.
Tesla shares have gained 42% in the last 12 months, and 15% since the new year. Thursday’s share price dip marked Tesla’s first losses in 2020.
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