When the news came that Tesla would start model production in China, Lin Gang, owner of an Xpeng car, just had a trial on Tesla’s Model 3 vehicle and was immediately impressed by the driving experience it offers.
“To be honest, if I had enough money, I would definitely purchase a Tesla model,” Lin told 36Kr. But he also admitted that vehicles manufactured by the Chinese electric vehicle (EV) maker Xpeng Motors were more cost-effective, in his words, users “can enjoy 50% of Tesla’s features while only paying 30% of the price.”
Tesla has started to build a new manufacturing facility for its Model 3 vehicles in Shanghai in January with an investment of USD 2 billion. Dubbed Gigafactory 3, the new Shanghai factory will be Tesla’s first plant outside of the US, targeting an annual capacity of 500,000 cars. The new facility was built in a record ten months, cost 65% less than comparable Model 3 production plants in the US, reported
a local Chinese media outlet.A Tesla salesperson told 36Kr that the China-made Model 3 Standard Range Plus are currently open for pre-orders to be delivered in the first quarter of 2020.
China is the world’s largest market for automobiles, and new energy vehicles (NEV) sales have topped the world for three consecutive years. It has sold about 872,000 NEVs as of September, 2.4 times the number of vehicles sold in the US last year, according to the China Association of Automobile Manufacturers.
Tesla saw its sales in the country rise 98% in the first seven months due to strong demand for the Model 3, according to research firm LMC Automotive. The California-based automaker earned USD 2.1 billion in revenue in the first nine months of this year in China, up 48% year-on-year, it said in a filing with the United States Securities and Exchange Commission.
With a market of such great potential, Tesla has plans to capitalize on that by building its manufacturing facility in Shanghai. It is the first and currently the only international car company to be allowed to establish a factory in China without a joint ownership deal with a local entity.
In China, many people want to buy a Tesla vehicle even if they have different reasons.
Some people are obsessed with the premium riding experience or its autopilot technology while some are after the “internationally renowned” brand as they believe the Tesla vehicles are assured the best quality. An industry observer told 36Kr that Tesla was the ideal choice for electric vehicles priced around RMB 400,000. “There were no other options for customers,” he said.
Back in late 2013 when Tesla just entered China, the booming market surprised Elon Musk, the company’s chief executive officer. Even though the official prices for models were not released and the delivery time for mass production was unknown at that time, the order number still exceeded 100 on the first day of pre-order with a deposit of over RMB 250,000 per vehicle.
Even though many players emerged during the next few years, Tesla was still thriving in the high-end EV industry. It ranked the top on the global EV sales list as of July with a market share of 12%, according to industry tracker EVsales. Domestic automakers Beijing Electric Vehicle and BYD came second and third on the list with market shares of 5% and 4% respectively.
“Except Nio, most EV makers in China don’t have a direct competition with Tesla,” a founder of an EV company told 36Kr. The head of another EV maker said, “[Tesla’s entry into China’s market] will have a huge impact on domestic players in a short term, and none of them has been harder hit than Nio.”
While Tesla’s mass production in China will impact local automakers, it still has weak points in terms of sales channel and after-sales service, an insider from a joint venture automobile company told 36Kr. It remains unknown whether the China-made models will maintain the same level of quality as the US edition. “Customers with a budget of more than RMB 300,000 can choose from those vehicles with more advanced functions than Tesla,” he said.
The price factor
Elon Musk used to claim that the China-made model would be a third cheaper than the US version, but this may not be true for now.
The price per vehicle is RMB 411,800 after including the Autopilot driver-assistance software, according to Tesla’s official website, only RMB 8,100 cheaper than the imported ones. Besides, the China-made Model 3 vehicles use LG batteries instead of Panasonic ones, while the latter are more mature and stable. Even this salesperson himself admitted that the first batch of China-made vehicles may not be well-developed. However, another salesperson in Tesla disclosed that they had already received a large amount of orders for the China-made model.
For both Tesla and its rivals in China, a price war is inevitable. The prices for most NEVs made by China automakers are around RMB 200,000, which will not compete with Tesla’s vehicles directly. Shanghai-based Nio will first bear the brunt with its models charging around RMB 400,000, similar to the price of Tesla’s locally-made vehicles.
Price is always a sensitive topic for customers in China. Although Model 3 vehicles have the lowest margin among Tesla’s models, many people still look forward to their growth after mass production in China, as it will attract customers with an acceptable price after several adjustments in its pricing strategy.
An industry veteran told 36Kr that the costs for procurement and labor in Tesla have greatly decreased after localization. “Labor accounts for 20% of a vehicle’s cost in factories outside China while the number for Chinese joint ventures is 5%. Tesla, as a wholly foreign-owned enterprise, is expected to have a sharper decline on its costs compared with other foreign brands in the Chinese market.”
Aside from the lowered costs above, it is the delivery of vehicles that determines whether the price for Tesla’s models will continue to drop. The cost per vehicle will be halved if Tesla’s annual capacity ramps up from 20,000 to 200,000. This means that after the productivity of Shanghai Gigafactory largely improves, the money spent on producing Model 3 vehicles will be further reduced.
Contact writer at sunhenan@kr-asia.com