Strategic Importance of China for Tesla motors

Tesla has grown into the market leading brand of electric cars. Innovation, product quality and superior customer experience are the hallmarks of Tesla. In the United States market, sales of Tesla cars grew faster this year. Most of Tesla car models experienced fast growth in sales. In 2019, the automobile industry entered a difficult phase. Car sales declined in several key markets including China the largest automobile market in the world. However, the sales of electric vehicles grew despite falling sales of other models. Several other auto brands including makers of premium and luxury cars also released new electric and hybrid models. Tesla’s entire range is seeing an increase in popularity which reflected clearly in sales figures of Tesla for the first two quarters of 2019.

Growing sales of electric cars indicates the industry is undergoing a transition. Brands need to reconsider their product strategy and grow their investment in emissions free and safer models. Tesla’s core market is the United States. However, China’s rise as the largest auto market of the world has turned it into an attractive destination for all auto businesses including premium car makers like BMW, Audi and Tesla. The auto firms are working on their business strategy for the Chinese market and how to achieve superior and faster growth there. China is strategically very important for Tesla as it is a large and attractive market with strong potential. Moreover, Tesla sales have already seen impressive growth in China.

Tesla in the International markets.

United States, apart from being the domestic market of Tesla, is also its largest geographic market followed by China, Netherlands and Norway. Recent reports show Tesla’s popularity in other European nations is growing. In United Kingdom, Tesla’s Model 3 has experienced faster growth in popularity in 2019. Tesla’s international footprint is smaller as compared to its nearest competitors. However, in the U.S., its sales have continued to strengthen. China is its second largest market based upon revenue. In 2018, its contribution to Tesla’s revenue was below 10%. To grow its presence internationally, Tesla is focusing on extending its supercharger network. The company has continued to develop its network of super-chargers and destination chargers along the most well travelled routes in North America, Asia and Europe. In the domestic market, Model 3 experienced growth in sales and demand after release. However, losses have continued. The company needs to form a strong and stable presence in the international market to control the loss run. Moreover, Tesla’s product range is smaller than leading competitors and limited to 3 main models. The company is growing its product range by adding Roadster and Model Y. Model 3 is the most popular of all these models in the U.S. and international markets.

China’s Economic growth and its position in the global auto market

For last several years, China remained the biggest car market in the world. Sales of cars peaked in China in 2017 but fell again in 2018. In 2017, passenger car sales in China reached 24.72 million units, rising from 24.38 million units in 2016 according to Statista. In 2018, sales of passenger cars in China again declined to 23.71 million units. Meanwhile in the United States, total car sales in 2018 grew 0.3% higher than 2017 and reached 17.27 millions. In China, the declining sales of cars is associated with the slowing down of GDP. Economic activity was weaker in China in 2018 compared to 2017. According to the official statistics released by the government, the real GDP growth rate in 2018 was 6.6%, the lowest since 1990. Some analysts have challenged the truth behind these numbers and how much they reflect real economic activity. The numbers give rise to some doubt and it is true that economic activity in China has weakened. It was also evident in the falling sales of cars and smartphones. According to McKinsey, economic activity in China will continue to soften in 2019. GDP growth rate is estimated to remain between 6 and 6.2 percent.

Economic activity in China might be softening but its economic growth rate is still among the fastest in the entire world. Most important is its enormous scale which means China will still add as much to its economy as the Australian economy in 2019. Even with dampening activity, China is the most shining consumer story in the world. Falling sales of automobiles, iPhones or cosmetics are not the complete picture. From 2019 to 2030, consumption is expected to grow by about $6 trillion. Online sales in China also saw stronger growth (24%) in 2018.

Moreover, some auto brands experienced growth in sales. In the premium vehicle segment, Audi is leading in China based upon sales figures released by FAW-Volkswagen Chinese joint venture. Audi had focussed upon the digital trends in China and on strengthening its local infrastructure. It is why the company is reaping the benefits earlier than other auto businesses. More than anything, Audi’s focus was upon the changing consumption patterns and how digital technology was becoming more and more integral to the lifestyles of Chinese buyers. Focusing upon these trends and patterns and analysing them to create products suitable to the local consumers’ taste and needs has enabled Audi to grow it sales and market share in China. It retained its growth momentum in the Chinese market even in 2019. Moreover, according to Leung (McKinsey), consumption remained strong in the first tier cities and softened in the lower tier cities. However, the credit crunch in China is real. Companies in the tier 3 and 4 cities of China and the small enterprises in the private sector are particularly feeling the impact of the squeeze. Despite all these factors, China still remains the largest and most attractive market for premium vehicle makers including Tesla. However, if Tesla wants to gain a bigger market share in China, it would need to tap into these customer trends. Digital is everywhere and people’s lifestyles in China are growing highly influenced by digital technology. Tesla can improve customer experience further by researching local lifestyles and understanding trends that affect its core consumers the most. It will help the company create more cars of choice for local consumers.

Strategic importance of China for Tesla Motors

China holds special strategic importance for Tesla. Tesla CEO Elon Musk believes China is a market full of potential for Tesla’s automotive and energy products. There are several factors that affect Tesla’s performance in the Chinese market including the economic and political environment. Tesla opened Gigafactory 3 in Shanghai behind which the main motive of the company and its CEO was to control logistics expenses. However, producing locally for Chinese consumers would also have additional benefits apart from low production and shipping expenses. First, it will help the company reduce its dependence on the core market, the United States. Second, China is the most important pillar of Tesla’s Asia growth story. The company needs to extend its international footprint to prevent losses from continuing.

Operational costs of Tesla will continue to remain high because apart from the costs of hardware and labour and because a lot of research and development goes into the making of Tesla cars. The best way to control costs is to produce locally. Construction of Tesla GigaFactory 3 in Shanghai has entered the second phase. Tesla has registered more wins in China including an impressive tax exemption which is generally reserved for the domestic companies. Its case is different and not just Chinese officials but the Chinese consumers too believe it. The company’s focus on innovation and customer experience is yielding good results in China. To grow faster, Tesla would be focusing upon local production which will help it reduce the higher cost pressure caused due to tariffs. The 10% tax exemption offered by the Chinese government will help the company manage its pricing for local Chinese consumers. Other factors that will help Tesla grow faster in China is the growing demand for environment friendly cars. However, during July and August of 2019, the sales of electrical vehicles in China has seen a steep decline. Besides that a sluggish economy and trade war between China and the U.S. have continued to worsen the situation for both domestic and foreign auto brands. The overall market environment in China is difficult for auto firms. Managing prices more efficiently in such a situation will help Tesla. During the first half of 2019, sales of Tesla cars remained better than previous two years.

Release of Tesla Model 3 has helped the company in both its domestic and international markets including China. With EV sales declining in China during months of July and August, the company might find it difficult to retain the same sales level in q3, 2019 as the first two quarters. However, even with the Chinese auto industry having entered a difficult phase, Tesla might continue to perform well. Once it has started producing locally, it can tap into consumer demand better and might be able to bring sales on par with its top competitors. Most analysts agree that the trade war and tariffs have had had a bitter effect on sales of auto as well as several other products. However, Gigafactory 3 is the key to faster growth of Tesla in China and when it starts rolling out cars locally, the company would be selling to a larger pool of customers. Managing prices efficiently in future would definitely help Tesla grow its penetration of the Chinese market. The situation looked difficult in 2017 and 18 too and the Chinese government is also trying measures to ease the situation. The tax exemption Tesla won recently matters a lot for the company. Apart from China, Norway is an important market for the company. However, to secure its future financially, Tesla needs to strengthen its sales and overall position in the Chinese market first.

Abhijeet Pratap

I am Abhijeet Pratap, editor of notesmatic. I am an MBA with marketing (major). Apart from writing on various topics in business management, marketing and English literature, I like to read and write about technology.