Tesla Resets Its China Strategy

A year ago when Tesla Motors‘ (NYSE:TSLA) CEO Elon Musk visited China to announce the launch of operations in the country, he was greeted with enthusiastic crowds. Musk was met with rapturous crowds in the cities of Beijing and Shanghai, and handed over car keys personally to customers. At the time he said that the demand for Tesla vehicles from the world’s largest auto market was so strong that if the company tried to meet it, it’d have to sell all its products in the country. A year later, Musk was back in China this month, but this time it was to announce that the company needed to reset its business in the country.

Initially, China seemed like an attractive market for the company.  China is already the world’s largest car market and also one of the most rapidly growing ones. The region is also one of the biggest markets for luxury cars as it is populated with a growing population of wealthy consumers with a growing appetite for luxury automobiles. Three cities from Greater China (Beijing, Hong Kong, and Shanghai) figure in the world’s top 10 cities with the highest population of Billionaires. Additionally, Tesla’s electric vehicle technology is seen as a great antidote to the air pollution in Chinese cities. Yet, sales have been slow. In the month of February, the registration numbers of Tesla vehicles were down from 469 in January to 260. ^[1] CEO Elon Musk blamed the slow sales on a poor sales team, which he said had been misleading potential customers about the ease of charging in the country. Now, the company is reconfiguring its strategy for the country. Below, we take a look at how Tesla plans to make its vehicles attractive again to customers in the region.

We have a price estimate of $171 for Tesla, which is about 10% below the current market price.

Wrong Signals

Unlike the United States, where Tesla vehicle owners prefer to drive the vehicles on their own, wealthy Chinese owners of luxury vehicles prefer to be chauffeured around and expect a luxury experience sitting in the backseats of their vehicles. Tesla had completely missed out on this point initially and this is one reason why sales have been slow. Now, Tesla has introduced an additional option of “executive rear seats” that are leather wrapped and offer two-zone heating for a payment of $2,000 on top of the purchase price. ^[2] In addition, the cars will now come equipped with the ability to control media, climate, and roof settings, with a smartphone. Tesla is also taking other measures in order to make its cars better suited to local tastes. Its cars are not equipped with popular local apps such as QQ Music and Xiami, and its navigation maps are unpopular because they aren’t the locally used ones from Baidu or Gaode. The Silicon Valley based auto maker is considering adding all these features into the new set of vehicles that will be sold in China.

However, all these reasons aside, the two biggest complaints against Tesla from Chinese customers have been the time lag between orders and delivery and the poor after sales service. These are serious issues and can impact consumer perception of the company very negatively. Currently, it takes around a month between the time a car is produced and delivered in the U.S., but in China the wait has been even longer. According to some reports, customers who had ordered the car in April, only received them by September, implying a five month lag. Elon Musk has stated in the past that he plans to localize both production and engineering in China within the next two-three years, but until that happens the company is going to have to figure out a way to deliver its cars faster into China. ^[3] This could mean having to pay extra for express shipping services and that could put a downward pressure on its margins. As far as after-sales service is concerned, this could be either a personnel problem or a problem with an inadequate number of service centers in the country. To resolve these problems the company will either have to hire new staff, or retrain current staff, and the company will have to open new service centers in the country. Both these measures will impact operating margins negatively.

Range Anxiety

The main problem that Tesla’s business has faced in China, according to Elon Musk, has been the wrong information passed out by its sales team in the country. Musk said that the customers had been informed that charging the cars is more difficult than it actually is. Now that that has become accepted wisdom, the company will have to take a set of measures in order to change popular perception. To this effect, Tesla, which already offered home wall-charging units for free in China, will start paying for the installation of these charging units, too. ^[4] Additionally, the company is now also giving out mobile connectors that allow drivers to use any outlet to charge their cars. ^[4]

All of these are token measures, though, and the company will have to rapidly expand its network of superchargers in order to alleviate concerns that vehicles are going to run out of battery far away from charging stations. One measure that the company is taking in order to address this concern is to use the concept of “destination charging” that it has used in the United States. The auto maker is planning to install a network of charging stations at destinations Tesla users are likely to frequent, such as hotels and malls. Currently, there are more than 1,000 such charging stations in the country.

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1. Tesla February Registrations in China Tumble, JL Warren Says, Bloomberg, March 2015 [↩]
2. Musk Reboots Tesla’s China Strategy, Bloomberg, March 2015 [↩]
3. Tesla plans China production of electric cars, The Standard (Hong Kong), March 2015 [↩]
4. Ref: 2 [↩] [↩]