Cut prices have given Tesla sales in China a bang, but analysts – and even fans – warn the US automaker needs to up its long-term game to avoid choking on the dust of fast-moving rivals in the world’s largest electric vehicle market.
Most directly, Tesla’s January price cuts drove deliveries of its China-made vehicles up 18% from December. Tesla’s high profit margins have enabled it to price war with competitors in China and beyond, analysts say.
But they say Tesla is lagging behind its competitors in China in launching new models, improving navigation systems and adding luxurious interiors or white-gloved customer service to cater to the evolving range of consumer preferences for electric vehicles.
“Tesla faces a serious problem with a very limited product mix,” said Cui Dongshu, secretary-general of the China Passenger Car Association (CPCA). “The slowness to respond to Chinese consumer preferences has resulted in a very passive positioning of Tesla to rely on few means, such as price cuts, to remain competitive.”
Even Tesla CEO Elon Musk himself has acknowledged that his company could face some of the stiffest competition in China. Tesla did not respond to Reuters’ request for comment on its China deal. Grace Tao, Tesla’s vice president in charge of external communications in China, said earlier that the price cuts in China reflected technical innovations, responding to Beijing’s call to boost economic development and consumption.
China’s Association of Automakers expects sales of electric vehicles and plug-in hybrids to grow 35% to 9 million vehicles in 2023 — almost a third of all new car sales in China.
While Tesla has increased sales in China, its second-largest market, it has also lost market share. Its share of China’s electric vehicle market fell by a third from 15% in 2020 to just 10% in 2022, according to CPCA data.
Tesla offers two models in China, the Model 3 sedan and the Model Y crossover. This keep-it-simple approach has driven scale and reduced costs.
After the recent price cuts, the Model 3 starts at around $34,000 and the Model Y at $38,000. But Chinese car buyers, who are heading back to showrooms this year after China’s strict COVID-19 curbs ended, will be courted by competitors offering a wide range of alternatives.
BYD, which surpassed Tesla in global sales volume last year and has a market value well over $100 billion, offers more than 60 different versions of electric vehicles and plug-in hybrid cars. Much smaller but ambitious competitor Nio has gone from two to six models in the same period and plans to launch five more this year.
“The aging product line is a real concern for Tesla,” said Yale Zhang, chief executive of Shanghai-based consulting firm Automotive Foresight. “Once BYD and other EV startups follow at lower prices, the impact of Tesla’s price cuts could disappear in no time.”
NO U-TURN AT TIANANMEN
Tesla’s self-driving software and navigation systems, touted by CEO Musk as a competitive strength, have also drawn criticism from customers for slow updates and bugs on Chinese roads. Luxury EV buyers who employ drivers are less interested in paying more for the software.
Chang Yan, a 34-year-old Chinese auto blogger who was among the Model 3 buyers in China in 2018, said his car still requires him to reverse on the heavily guarded Chang’an Avenue near Tiananmen Square, where such movements are prohibited.
“This is in sharp contrast to Nio, (EV brands) Xpeng and Li Auto, whose navigation aids work almost perfectly,” said Chang, who also drives a Nio sedan.
Tesla is considering shifting its marketing in China, focusing more on energy efficiency, convenience features and less cutting-edge functionality, said a person with knowledge of the matter.
It has also been investigating how its Chinese competitors, led by BYD, are attracting customers in showrooms, particularly in smaller cities, the person said, declining to be identified as they are not authorized to speak to media.
One takeaway: BYD ensures that the bottles of drinking water offered to showroom visitors are warm in winter to accommodate local preferences.
Tesla, which earlier this year promoted its China boss Tom Zhu to head of global sales and manufacturing, is also giving its China sales team a more direct link with product development engineers to provide local feedback, said the person familiar with the matter is.
LESS IS MORE?
Sure, the Tesla design aesthetic, with its sparse interior and faux leather, still appeals to many.
Cui Yang, a 31-year-old doctor who bought a Tesla after the recent price cut in Beijing, said he was won over by “the minimalist interior style and the tech feel.”
On the other hand, Chinese brands like Nio and Zeekr tout their butter-soft Napa leather and traditional luxury features like seats with massage functions that target both passenger and driver experiences.
Some electric vehicle manufacturers believe that this premium segment of the market will grow rapidly in the coming years.
Li Auto is aimed at EV buyers looking for cars that can transport families and who expect to pay above Tesla’s current prices, starting at around $44,000, a sales category that is expected to it will represent 10 million vehicles in market-wide sales by 2025.
Then there is a “Buy Local” challenge for Tesla.
Chinese consumers like Lin Wenwei, 50, who wants to support a Chinese brand – even though Tesla makes the electric vehicles it sells in China.
“I’ve always been more inclined to buy a domestic brand of electric vehicles for the national industry,” Lin said while trying out a Seal sedan for his son at a BYD dealership in suburban Shanghai — after sharing a BYD Dolphin with him Hatchback had worried.