NEW ENERGY: Tesla Bows To China Challenge With Market Reboot

By newsdoug on April 1, 2015

Bottom line: Tesla’s China reboot appears to be complete, paving the way for it to gain some traction in the market by year end if it can effectively target the nation’s wealthy, image-conscious trend setters.

Nearly a year after driving into China on a wave of fanfare and big hopes, electric vehicle (EV) superstar Tesla (Nasdaq: TSLA) is pressing the reset button on a market that has huge potential but also some major obstacles. This particular reset has been in the works for the last few months, but appears to be near completion with indications that the company has discarded its previous short-term aggressive sales targets for the market.

The reboot to Tesla’s China business is discussed in a series of interviews by Zhao Kuiming, its head of China sales, who was on a PR offensive following the recent overhaul. (Chinese article) It’s unclear from the reports if Zhao is new to Tesla, but he appears to be the company’s new public face after previous China President Veronica Wu resigned in December after just 9 months on the job. (previous post)

In one of the interviews, Zhao points to China’s lack of infrastructure as a major obstacle for the company in the first year since it entered the market. Previous reports had indicated Tesla believed that China could quickly become one of its top global markets, with annual sales of 4,000 to as many as 8,000 EVs possible as quickly as this year. But the most recent reports have said the company only sold 120 cars in China in January, showing just how difficult those lofty targets would be to attain.

The headline on Zhao’s latest interview says the company has temporarily put aside any short-term sales targets, and instead is focusing on building up the foundation it will need to support customers over the longer term. Zhao never actually addresses the issue of specific sales targets in the body of the article, though the tone does seem to indicate that Tesla is focusing on other matters for now.

The fact that Tesla is now going on a PR offensive appears to show that its China overhaul may be complete. The lack of figures in Zhao’s first interviews is also striking, and seems like a smart tack even though it will inevitably leave investors hungry for a clearer picture of how the company sees the market. Tesla’s shares surged last year, partly on unrealistic expectations for China, and have lost about a third of their value since last September as reality has set in.

I can’t comment on Tesla’s situation in the US, but China is clearly a market that isn’t quite ready for EV prime time. Billionaire Warren Buffett has made a similar discovery with his investment in the sputtering BYD (HKEx: 1211; Shenzhen: 002594), which has also struggled after its big bet on the China EV market failed to materialize as quickly as the company had expected.

Tesla zoomed into China with big hopes last year, and its charismatic chief Elon Musk personally presided over the company’s first high-profile local sale last April. (previous post) But since then Tesla has struggled to meet the high expectations it set for itself. It has blamed the problems on lack of infrastructure, though that’s probably only part of the problem. After all, the company was never targeting a mainstream audience with its high-end cars, and anyone who could afford a Tesla was probably more interested in being a trend-setter without too much worries of where to find a charging station.

Instead, Tesla’s problems are probably due to a combination of factors, including management and marketing teams that failed to understand the complexities and unique features of the China market for luxury cars. As a result of those stumbles, Tesla has cut about a third of its China workforce, with media reporting earlier this month that the company had laid off about 180 of its 600 locally based workers.

It’s good to see that the overhaul appears to be in the rear view mirror, and also that Tesla is tamping down expectations to avoid a similar disappointment with its relaunch. The company’s previous moves to develop infrastructure look like a good start to building up a solid platform for long-term growth in China. But Tesla will also have to show it can manage in the tough market, which will only become clearer in the year ahead as we get a better glimpse of the new team that will lead its reboot into China.