Tesla Expands Into China But Should Only Be A Small Player In The Luxury Segment

+18.70%
Upside
176
Market
209
Trefis
TSLA: Tesla logo
TSLA
Tesla

Tesla Motors (NYSE:TSLA) has expanded its operations to China, the world’s biggest passenger-car market. On April 22, the company’s CEO and chief product architect, Elon Musk, personally delivered Tesla Model S units to Chinese customers. The Tesla Model S is an electric sedan which belongs to the super luxury car segment in China. It is priced at $121,000 in the region, import taxes and shipping accounting for the difference with its U.S. price tag of $81,000. The company sold 23,000 units in 2013 and has announced a target of 35,000 for 2014. Sales in China will be key to achieving the target. The company hopes to be able to sell at least 5,000 cars in China by the end of the year. In this article, we take a look at the opportunity that China represents for the company over the long term. [1]

We have a price estimate of $150 for Tesla, which is about 25% below the current market price

See full analysis for Tesla Motors

Relevant Articles
  1. Down Almost 20% This Year, Is Tesla Stock Good Value?
  2. Down 9% Year-To Date, Will A Q4 Earnings Beat Drive Tesla Stock Higher?
  3. With Delivery Growth Cooling, Is Tesla Stock Still A Buy At $250?
  4. Following A Lackluster Cybertruck Debut, Is Tesla Stock Overvalued At $240?
  5. Will Weak Earnings Follow Tesla’s Mixed Delivery Report?
  6. With Deliveries Missing Estimates, What’s Next For Tesla Stock?

China To Drive Global Auto Market

China surpassed the U.S. as the leading single-country passenger market in 2010, and is expected to maintain its strong growth momentum. According to an analysis by McKinsey, China is expected to contribute about 35% of the worldwide growth in revenues generated from passenger car sales over 2011 to 2020. The report also points out that the Chinese Government is likely to introduce policies that restrict car use in urban areas to curb rapidly deteriorating traffic conditions and address environmental concerns such as air pollution. Restrictions on number plates, which are awarded on the basis of a lottery system, in eight cities is just one measure in this direction. The report estimates that by 2020, at least 20 cities will have introduced similar restrictions. The upshot of these restrictions it that alternative approaches to vehicle ownership, such as improved public transportation and increased availability of car rentals, might have to emerge in order to be able to meet the demand for mobility in the country. [2]

On the face of it, this makes China seem like a tough market to negotiate: it offers tremendous growth opportunities but there exist several barriers in order to be able to attain the cash the growth should generate. However, there is another aspect to the China story. Local governments such as Beijing’s have been trying to goad residents into buying electric cars with low emissions. The Beijing government has set aside 20,000 license plates for EV buyers. The plan is to have 50,000 electric or hybrid vehicles on the roads of Beijing by 2015. To this end, the government is offering subsidies to both buyers and sellers in order to encourage the popularity of electric cars. Tesla does not qualify for these subsidies yet, but the Chinese Government might be edging closer towards offering subsidies to foreign suppliers of electric vehicles. [3]

Questions About Tesla

At present there are obstacles to the uptake of Tesla’s vehicles.

  • The first is “range anxiety”- a term attributed to the suspicion that an electric vehicle will run out of charge before reaching its destination far away from a charging station. This is not a problem unique to China and the feeling has been known to disappear once people actually start driving an electric vehicle. However, a dearth of charging stations might be a problem. Tesla is in talks with State Owned Enterprise Sinopec to build a network of charging stations across China. This, however, will take time and might be enough to kill the initial buzz. [4] For the moment, Tesla’s plans to use its service technicians to help provide a secure electric wiring plan to customers as long as they have a designated, secure parking space, such as in an apartment building, a house or a workplace.
  • The second issue relates to whether Tesla can fulfill the orders from customers fast enough so as to not tick off customers. Several orders, some made as far back as October, 2013, have yet not been delivered. The company says that the orders have been delayed so as to ensure that the customer has a top quality driving experience when s/he gets the car, but this has upset some customers. [5]
  • The third relates to whether Tesla will enter into a joint venture with a local company in China. In the Q&A following the earnings call for Q4F13, Elon Musk was quizzed about the difficulty of acquiring distribution licenses in China unless the company in question was in a joint venture with a local company. Musk responded by saying that he felt that sales and services in China was not a problem and the expectation was that you’d partner with a local entity to source your raw material from. However, Tesla has no plans of moving production to China for at least three or four years- it has just delivered its first cars in China-the question of such a partnership does not arise. [6]

Taken together, it is clear that Tesla is still just testing the waters in China. However, there are many encouraging signs for the company. Tesla’s pricing is such that its cars can only be afforded by high income consumers so far and the island of Hong Kong alone has enough millionaires to be able to buy all the cars it can supply to China this year. [7] For the time being, Tesla should only be considered as a new entrant into the premium car segment in China. Of a total of 21.98 million units sold in China last year, 10% were premium cars. If Tesla sells 5,000 cars this year in China, it will still only be a small player in that market. But given that the premium car segment is usually about 15 to 20% for developed countries, there is still room for growth in this segment and Tesla has a significant opportunity to capitalize on it. [8]

See More at TrefisView Interactive Institutional Research (Powered by Trefis)|Get Trefis Technology

Notes:
  1. Tesla Kicks Off China Sales This Month, Bloomberg, April 2014 []
  2. A Perspective On China’s Auto Market By 2020, McKinsey [PDF] []
  3. Here’s Why Only 0.09% of Chinese Customers Are Embracing EV’s, IBTimes, February 2014 []
  4. Tesla To Talk With Sinopec About Charging Network In China, Forbes, April 2014 []
  5. Tesla’s Delays Upset Some China Customers, Wall Street Journal, April 2014 []
  6. Tesla Motors Management Discusses Q4 2013 Results, Seeking Alpha, February 2014 []
  7. Hong Kong Has More Millionaires Than Ever, South China Morning Post, March 2014 []
  8. Beijing Drives Home Status In Luxury Car Market Show, South China Morning Post, April 2014 []