Here’s Why Tesla Needs To Be Cautious In China

Recently, Tesla Motors (NYSE:TSLA) announced that its new car owners in China will no longer enjoy free supercharging for the life of the vehicle. This is in line with its global policy and does not impact existing owners who ordered their cars before January 15th. However, consumers in China are critical of this policy and have started doubting Tesla’s other promises. The company faces tough competition in the region with local companies building cheaper electric vehicles. A Chinese start up NextEV already claims to have built the world’s fastest electric vehicle, which is likely to be cheaper than Tesla’s Model 3.  The Chinese branded electric-vehicles market is supported by huge government subsidies as China looks to build global leadership in clean energy. The Chinese government has a target of 5 million electric vehicles to ply on the country’s roads by 2020 and is subsidizing local players to achieve large scale production. However, these local vehicles do not offer the luxury and long range of Tesla and are likely to gain market share on their lower costs. With China on track to become the largest electric vehicles market in the world, several players are looking to enter this market with a wide range of offerings creating a stiff competitive environment for Tesla. Audi announced recently that it would introduce five new electric vehicles in the country over the next five years. General Motors’ Chinese joint venture is investing $ 3.8 billion in electrification and developing 10 ‘new energy’ models by 2020. And the Indian company Mahindra is looking for a joint venture in China to manufacture and sell electric vehicles in the region.

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Chinese customers are not “automatic” fans of Tesla and might look for other luxury and value-based electric alternatives. Tesla’s change in this life-of-car charging policy is likely to impact value-seeking customers more, given that they are price sensitive to begin with. Tesla’s Model X, which is its “mass scale” electric vehicle, is more likely to be impacted by the change in its “free charging for a life time” policy and wider availability of other cheaper brands. Tesla’s charging rate is a “guide” rate which can be increased in future. Any increase in this rate can irk Chinese customers since they are averse to price increases.

So far, Tesla has had a good innings in China. Its Model 3 reservations in China were higher than any other country in the world, other than the U.S.  and the company is considering construction of an assembly factory in the region. While this is a strong indicator of the company’s growth potential in the region, it needs to tread carefully in China. Players across the globe are looking to capture the Chinese EV (i.e., electric vehicle) market and competition especially for the low priced Model 3 is likely to get tougher. According to our estimates, Tesla’s Model 3 (Gen III) is the most important segment of its business accounting for nearly 50% of its valuation. We expect Gen III to capture a 20% market share in the global EV market by the end of our forecast period.

While the electric vehicles market is still at a nascent stage, China is the most important region for players in this segment. With government subsidies and high demand for EVs, several players are looking to establish themselves in the region. Tesla is likely to be a key player in this market with its luxury offerings, long range and wide network of supercharging stations. However the company needs to be cautious of the Chinese sentiment as it looks to grow further in the region.

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