Many U.S. companies have tried to crack the China code in the past, but very few have come out successful. Could Elon Musk and Tesla reverse that trend?
Tesla’s (NASDAQ: TSLA) Gigafactory 3 is currently under construction in Shanghai, China. The factory will produce the Tesla Model 3, Model Y, and battery cells at an estimated production rate of 250,000 electric cars per year. By the end of the year, it is estimated to have made 6,000 units which will only be added to the company’s growing stockpile as it doesn’t have the permit to sell them yet. The factory is estimated to have cost over 50 billion yuan ($7 billion), the largest foreign-invested manufacturing project in China.
China is the world’s largest market for Electric Vehicles (EV) and there is much more potential for growth in the coming years. 777,000 new EVs were sold in 2017, up 53% from 2016, with this number expected to reach 2 million by 2020. Tesla has been badly hit in China because of the U.S.-China trade war which imposed import duties, transport costs, and ineligibility for EV tax credits. However, building this factory will allow it to make its cars at a much cheaper price and claim those tax credits.
Foreign automakers and Tesla competitors like Ford (NYSE: F) and General Motors (NYSE: GM) had to work in conjunction with a joint venture partner in China because of government policies. That means they had to share profits and potentially even the technology with their Chinese partners. But last year, China started to lift these restrictions, giving Tesla the opportunity to build a Gigafactory in China. Tesla can build over 1,000 cars per week with the potential to manufacture up to 3,000 cars. Tesla’s Model 3 appeared to be priced around Rmb355,800 ($50,320) which is on par with gasoline-powered midsize sedans (even before gas savings and other benefits).
A part of Tesla’s Gigafactory 3 in China is offered to LG to manufacture batteries, who will now split that capacity with Chinese battery giant CATL. This move was welcomed by investors as CATL has a number of connections in China, both with the government and the supply chain. Tesla went on and acquired Chinese battery startups like Maxwell Technologies and Hibar Systems Limited which will give it more resources and power to independently manufacture batteries in China.
However, even after considering all of these factors, it doesn’t necessarily mean that China will be a complete success. Tesla faces stiff competition from established Chinese players like BYD and BAIC with enormous market shares, and their foreign counterparts like Porsche, Jaguar, and new players like NIO. Apart from this, China has a wide range of short-range, low cost & low-speed electric vehicles, with most coming in under $20,000. With all of these players continuously investing and coming up with new technology, it will be hard for Tesla to gain more market share.
Industry experts have explained how important it is for Tesla to stick with its premium brand and not try to go into the affordable range. This strategy worked out pretty well for Apple (NASDAQ: AAPL), which stuck to its premium image as it launched into China, unlike Samsung, which launched a variety of products for different user segments and started losing its sales and brand image. Other companies that were successful in the U.S. like Qualcomm (NASDAQ: QCOM) and Boeing (NYSE: BA) have gone on to dominate the Chinese market in their respective industries by producing superior quality products.
Bad examples include Amazon (NASDAQ: AMZN) and eBay (NASDAQ: EBAY). These two entered China in the early 2000s with a high-handed approach knowing they had better technologies. The result was devastating for them, missing growth opportunities and withdrawing from the Chinese markets. A better example for Tesla is GM’s success, which now manufactures and sells more cars in China than the U.S.
There is no question that there is a potential in the market, it all comes down to execution for Tesla. If it can maintain that quality and offer value for money it will be successful in the Chinese EV market.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Amazon, Apple, Ford, General Motors, and Tesla. Read our full disclosure policy here.