TESLA’S CHARGE FORWARD

The first fully foreign-owned auto production plant in China, construction began in January 2019 and finished in just 10 months. By October 2019, Tesla was selling China-built cars. Although the global coronavirus pandemic temporarily disrupted manufacturing, the factory soon resumed production as China brought the health crisis under control. 　

Tesla reported that the factory was producing 5,700 vehicles a week in November 2020, equivalent to an annual output of 300,000 vehicles. In the meantime, Tesla substantially increased local sourcing of auto parts. 　

According to a report on tech business outlet chinastarmarket.cn, localization of its Model 3 increased from 30 percent in late 2019 to about 80 percent by mid 2020, and 100 percent by the end of 2020. 　

As increased localization drives down cost, Tesla adopted a more aggressive pricing strategy for the Chinese market. In the second half of 2020, Tesla marked down its Model 3 sedan from 360,000 yuan (US$55,525) to 250,000 (US$38,559) yuan. 　

The price cut led to a wave of purchases ahead of the Chinese New Year holiday. The company’s official website in China reportedly crashed due to a sudden surge of traffic. 　

According to the China Passenger Car Association, an industry body, Tesla’s sold 137,459 Model 3 vehicles in 2020, well ahead of its major Chinese competitors, including the Nio, Li Auto, and Xpeng, which sold 43,728, 32624 and 27,041 units in the same period. 　

Tesla’s new round of price cuts is expected to further consolidate its lead. It was reported that many of Nio’s pre-order customers, arguably the highest-profile Chinese maker of electric cars whose IPO on the New York Stock Exchange in 2018 raised billions of dollars, canceled their orders after Tesla’s price cut was announced. Nio released its latest model, the ET7, on January 9. Equipped with self-driving technology features which the company claims surpass those of Tesla, the model is priced at 448,000 yuan (US$75,280), about a quarter more than Tesla’s Model Y. Many analysts believe that it would be a tough sell given Tesla’s brand recognition and aggressive pricing strategy. 　

But Nio CEO William Li said he is not worried about Tesla’s pricing strategy. Refuting reports that potential customers are abandoning the company, Li told media that the impact of Tesla’s price cuts will be mostly felt by traditional automobile companies. 　

Li’s view was shared by Cui Dongshu, secretary general of the CPCA. Widely considered a luxury car brand, Tesla’s major competitors in China are conventional car brands such as Mercedes Benz and BMW, Cui said. 　

“Its pricing scheme disrupts the conventional premium auto market and shatters the traditional belief that the cost of an electric vehicle (EV) should be higher,” Cui said. Rather than damage the prospects of domestic electric car startups, Tesla’s pricing can attract more customers to opt for electric cars, which will help to drive down production costs for the entire industry. “It will be a virtuous cycle,” Cui added. 　

Indeed, on January 28, German automaker BMW announced price cuts for its all-electric iX3 SUV in China to 399,900 yuan (US$61,713), a 15 percent drop from the 470,000 yuan (US$72,550) announced in September 2020. 　

With increased localization and price cuts, the Association of Automobile Manufacturers estimated that sales of new energy vehicles will jump 40 percent in 2021 to 1.8 million units. 　

Although overall automobile sales dropped by 2 percent in 2020 due to the coronavirus pandemic, sales of new-energy vehicles increased 12 percent to 1.17 million, accounting for about 5 percent of all vehicles sold in the year. 　

As the Chinese government set a target for new energy vehicles such as electric, plug-in hybrid and hydrogen-powered vehicles to account for 25 percent of new car sales by 2025, analysts believe the electric car market will boom in the next couple of years. 　

In 2020, China’s electric car industry underwent a major reshuffle after several startups, including Byton, Bordrin Motor, Jiangsu Saleen and Changjiang EV, crashed. In the meantime, more high-profile internet companies are joining the race. 　

In November 2020, China’s State-owned automaker Changan Automobile announced plans to work with Huawei and CATL, a leading Chinese battery maker and a Tesla supplier, to create an upscale smart vehicle brand. 　

In the same month, Alibaba, which already holds a major stake in Xpeng, announced it would join with SAIC Motor and Shanghai Pudong New Area to launch a new auto brand called IM. On January 13, IM released two all-electric concept models, which it said would hit the market in April 2021 and 2022. 　

On January 11, China’s search engine Baidu announced plans to partner with Geely, a Chinese automaker which owns Volvo, to make smart electric vehicles. 　

On December 31, China’s Ministry of Finance announced a cut in electric vehicle subsidies of 20 percent, roughly from 18,000 yuan ($2,800) to 14,400 yuan. The move is expected to create even more competition in the already hotly contested market. 　

Subsidies for electric-vehicle purchases have played a major role in making China the world’s largest market for electric vehicles, accounting for about half of global sales. 　

China had planned to phase out the subsidies by the end of 2020. But after it began to phase them out in June 2019, electric car sales declined throughout the second half of 2019. When the global pandemic hit in early 2020, causing a plunge in auto sales, the government decided to extend the subsidies for another two years. 　

As the subsidies only apply to new energy cars sold at 300,000 yuan (US$46,275) and below, the scheme put Tesla’s more affordable domestic competitors at an advantage. But analysts believe that by expanding production capacity and enlisting more local suppliers into its supply chain, Tesla could further drive down production costs and bring its sticker price below the 300,000 yuan threshold, wiping out the competitive edge of its domestic rivals. 　

Citing several current and former Tesla China employees, the report alleged that Tesla’s Shanghai factory lowered its quality standards by using defective parts and developed a “high-handed” corporate culture, leading to deteriorating working conditions for its Chinese employees. 　

Calling the claim “outrageous and beyond imagination,” Tesla said it would take PingWest to court. So far, the impact of the report appears to be limited. According to a quality survey issued by consumer data service JD Power in December 2020, Tesla cars made at its Shanghai Gigafactory were among the highest-quality models sold in China, second only to Nio’s vehicles. 

In the last few months, there appears to be a surge of consumer complaints not only about the quality of Tesla vehicles, but about its “arrogance” in dealing with quality issues. In a case in late January, a Tesla Model 3 burst into flames in a Shanghai parking lot, which Tesla responded was due to collision damage. 　

In February, a Tesla Model 3 malfunctioned after charging the battery at a supercharger station. A Tesla employee blamed the national grid for damaging the vehicle, which drew a rebuke from the national grid. Tesla later apologized for the incident. 　

On February 8, China’s market regulator, the State Administration for Market Regulation (SAMR) and four other departments summoned the company over quality issues, including unexpected accelerations, battery fires and abnormal over-the-air (OTA) upgrades, and urged the carmaker to “strictly abide by Chinese laws and regulations and protect consumers’ legitimate rights and interests.” 　

Quality issues have long been a key issue in the development of electric cars, which are widely perceived to be less reliable in terms of quality and safety. It remains unclear how the quality complaints will affect Tesla’s performance in the Chinese market in the next months. 　

With so many variables and uncertainties, it will be a long battle for both Tesla and its rivals to gain a firm foothold in the world’s leading electric car market.