New Energy: Tesla Eyes Local Production to Rev Up China Engine

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Bottom line: Tesla’s newly announced modest China sales and announcement of a plan for potential local production reflect the uphill road it faces in the Chinese market, which is unlikely to get much easier in the next 2 years.

Tesla still searching for China sales charge

China is fast becoming the land of promising upstart companies that failed to reach their potential, with word that former new energy superstar Tesla (Nasdaq: TSLA) has posted very ho-hum car sales in a market where it once held out big hopes. The rare China sales figures come as Tesla discussed possible plans to localize some of its manufacturing in the world’s largest auto market, a move that charismatic founder Elon Musk says could cut the cost of cars by up to a third.

The latest Tesla news came from a local media event in China that didn’t go off too smoothly, and apparently wasn’t meant to be reported by foreign media. The event’s lower-key nature and other glitches were unusual for Tesla, which was traditionally a master at slickly orchestrated events and appearances by Musk that gave the company hugely positive publicity when it first drove into China last year.

Of course much has changed since then, and Tesla has been just one of several new energy car makers that have been hobbled by weak consumer sentiment towards a sector that has sputtered despite strong promotion from Beijing. Total electric vehicle (EV) sales in China stood at a 5,114 in the first half of the year, up around 40 percent from a year earlier but still quite a paltry figure. (previous post)

Tesla has been quite tight-lipped about its China sales since cruising into the market more than a year ago, but revealed during Musk’s visit that it sold 3,025 of its mainstay Model S cars in the country in the first 9 months of this year, including 1,680 in the first 2 quarters. (English article; Chinese article) That means the company sold about a third of all EVs purchased in China in the first half of the year, and also that its sales picked up sharply in the third quarter.

King of the Ant Hill

So perhaps Tesla can boast that it controls a third of China’s EV sales, though the market is so small right now that such a boast doesn’t really seem to carry much weight. The reality is that Tesla had much bigger hopes for China when it entered the market last year, hinting that it hoped it could sell as many as 10,000 of its EVs there each year. (previous post) But things didn’t go quite as smoothly as it anticipated, with the company suffering from a combination of its own internal issues and also a much broader failure of wider incentives by Beijing to boost the market.

As a result Tesla conducted a major China overhaul early this year that included the departure of its local head and reportedly also saw large layoffs of its relatively modest local staff. It’s unclear what the company has done differently since then and whether these latest rare sales figures represent achievement of its newer targets or still represent weak performance.

What we do know is that Tesla is in negotiations to do some production locally, a move that it says could lower the cost of its expensive cars by as much as a third. The fact that Musk was talking about lowering car prices seemed uncharacteristic, since Tesla was typically aiming for high-end buyers who wanted to own the latest high-tech gadgets and weren’t so price sensitive.

In many ways, Tesla’s missteps look a bit like another former high-flyer, former local smartphone superstar Xiaomi. After a hype-filled first few years, Xiaomi’s prospects have suddenly stalled as it faces its own issues, including some technical glitches, lackluster new product reviews and most notably intense competition in the China smartphone market. In this case Tesla seems to be facing different issues, some company-specific and others related to the broader China EV market. I wouldn’t write off the company in China yet, though it could still be another few years before it starts to reach some of the loftier targets it first suggested during headier times when it first arrived to the market.

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