Holding just 8.6 percent of the China market share, the electric vehicle manufacturer announced Shanghai as the location of its second Chinese gigafactory last month. But will this move be enough for Tesla to challenge China’s thriving domestic rivals?
Electric Cars at the Heart of the Trade War
Stars could be aligning for Tesla in China due to changing laws amidst the current US-China trade war. Previously, foreign carmakers that wanted to sell in China would have to pay a hefty 25 percent import tariff or else enter into a partnership with a domestic company that would take 50 percent ownership of the brand in China. However, China announced last month that it was going to relax its rules requiring foreign car manufacturers to go into business with domestic partners.
The move seemed likely to benefit Tesla since the company didn’t have as big a presence in China as many other large luxury automakers. According to the Chinese finance media outlet Yicai, Tesla set up a wholly-owned subsidiary in Shanghai on May 10 with $15.8 million of capital. Then, in early June, Tesla announced the location of its next gigafactory outside of Shanghai.
On June 18, while US-China trade tensions continued to rise, China announced it would raise import duties on a $34 billion list of American goods—a list that included electric cars. This was fine for the prescient car company, which will now manufacture cars for Chinese consumers from within its Shanghai factory with what should be a nice price cut.
Government Incentives Boost Luxury Electric
China now boasts the world’s largest electric car market according to a report by Forbes, which estimated that 579,000 electric vehicles were sold in China in 2017 versus 198,350 in the U.S. in the same year. Overall, China is now home to approximately 1.23 million electric vehicles.
Undoubtedly contributing to China’s love of electric cars is a government incentive that offers subsidies to China’s buyers. Tesla CEO Elon Musk spoke at the National Governors Association last year, saying that “sometimes people are under the impression that China is either dragging their feet or somehow behind the U.S. in terms of sustainable-energy promotion, but they are by far the most aggressive on earth.”
And China has stepped up their environmental efforts yet again. As of this February, the subsidy amount offered to consumers for electric cars with a range of more than 249 miles on a single charge rose to 50,000 RMB ($7,900) according to China’s Finance Ministry. This is great news for soon-to-be buyers of the luxury Tesla Model 3: a vehicle that can travel up to 310 miles on a single charge.
$7,900 is no small return for a luxury car that costs upwards of 44,000 dollars, but China’s domestic electric car companies should remain competitive. That’s because cars produced by domestic automakers avoid import tax, allowing Chinese companies to offer cars at a decent price, even for luxury vehicles.
China Knows What China Wants
For American born-and-bred Tesla, electric and luxury have long gone hand-in-hand. The sought-after cars are famous for their “falcon-wing” doors that open upwards, and a sleek aerodynamic design. But China, too, are striving to combine a love for electric with a certain sports car je ne sais quoi.
The Chinese electric automaker Nio, which is set to go public later this year, is positioning itself as a luxury competitor for Tesla. Last December, it launched its ES8 at about half the price of Tesla’s Model X. Nio’s ES8 starts at 448,000RMB ($67,765), which is a good deal less than the Model X’s hefty price tag of 836,000RMB ($126,470) in China.
Nio Founder William Li spoke to CNBC at the ES8 launch event and claimed that “we do have lots of customers that turned to us from Tesla, and many who have bought products from both. For sure I think Tesla is our rival in that consumers will choose between our products.”
The Chinese car startup allows luxury consumers to purchase their vehicle through a mobile app—a strategy that has confused many American netizens. On the luxury car forum Teslarati, one user commented “How can you buy a luxury vehicle without taking it for a test drive first? This will never work, [it’s] surely just a temporary gimmick.”
That fear, however, does not apply to Chinese consumers of mobile luxury purchases. Consumers are used to spending on apps WeChat and Alipay, and luxury real estate companies like the online marketplace Investorist have found buyers willing to part with millions of dollars at the tap of a touchscreen. Therefore, Tesla—even after a significant price drop due to its new Shanghai digs—might have a long road ahead in competing with Nio in the luxury electric market.