Auto Industry

Charging ahead

Tesla counting on China for strong sales growth this year

TECH-SUMMIT/

Musk: upped China sales target

The green revolution in Oslo – the electric vehicle (EV) capital of the world – is having some unintended consequences. Especially for bus drivers. Three-quarters of rush hour traffic in bus lanes is now electric, according to the Norway Post, as green cars take advantage of new rules allowing them to drive in previously restricted areas.

Almost 8,000 new EVs were registered in Norway in 2013. Many were made by Tesla Motors, which opened six charging stations last August that put 90% of the population within range of its all-electric Model S. It was a top-seller for the remainder of the year, transforming Norway into Tesla’s best market on a per capita basis. Green-minded citizens have boosted sales but eco-friendly policies have been helping too. Sales tax on EVs has been cut to zero, delivering huge savings. Then there are the extra incentives, like the bus lane benefits .

Despite its Norwegian nirvana, Tesla knows that its chances of making a global breakthrough depend on larger markets buying into an electric future, including countries like China. And there is some progress to report: Tesla opened its first store in Beijing last year, taking some high profile pre-orders. It has also resolved a trademark dispute with a local businessman who had registered its Chinese name (see WiC206). But Tesla says this year will be much more transformational. In 2013 it sold 25,000 cars globally but it is aiming for 50,000 new sales in 2014 – and it expects China to make up about a third of the increase.

If so, it would be spectacular progress. Less than 15,000 pure EVs were sold in China last year, according to the China Association of Automobile Manufacturers, so the targets are huge in market share terms. But Elon Musk, the company’s founder, is bullish. China “could be as big as the US market, maybe bigger,” he told Bloomberg in January. “Even without building there locally, it’s always going to be the second-biggest market after the US.”

Tesla’s marketing strategy is less about pulling on the environmental heartstrings than building up the Tesla brand, including an appeal to the snob value of Chinese drivers. The Model S is billed as a high-performer and not just a zero-polluter, as the company’s vice president of corporate and business development Diarmuid O’Connell explained to the Wall Street Journal earlier this month. “We don’t compete with electric vehicles,” he insisted. “The car was designed to compete with other vehicles in its class such as the BMW 5 series or the Mercedes E-class or S-class. As far as I know, no Chinese EV manufacturer has got anything in our segment.”

Championing the Tesla blend of luxury and performance makes sense because the EVs made by Chinese firms like BYD cost a lot less. But the positioning has created a dilemma for Tesla’s pricing team. Although it wants to establish premium status for the Model S, Tesla is asking customers to take a leap of faith in buying an EV, something that few Chinese drivers have chosen to do so far. It also wants to nurture an image as an industry outsider, ready to shake up the market.

The pricing for the Model S offers an early opportunity to show how Tesla is different. The first tactic is to show transparency, including a full breakdown of how the car is costed: $81,070 as the base price for American consumers; $3,600 to ship it to China; $19,000 in customs duties; and then another $17,700 in VAT. That adds up to a $121,000 (Rmb734,000 at current exchange rates).

The next objective is to create a stir. Despite the effort to establish a luxury presence like BMW or Audi, Tesla is making a determined effort to stand apart from its peer group. Specifically the message is that – unlike other foreign carmakers – it won’t be gouging its customers. Tesla is telling the Chinese that it is treating them no differently to owners elsewhere by starting out with the North American price and only adding the costs of shipping and selling the car in China.

“I don’t think ripping off customers is a good long-term strategy,” Musk told Bloomberg.

Presumably the plan is to spark more demand for the Model S as buyers realise that they are getting a fair deal, and not just doing a good deed for the environment.

But the irony is that Tesla is worried that the ‘low price’ strategy could confuse Chinese customers long accustomed to regarding higher prices as proof of higher quality and greater cachet.

“This pricing structure is something of a risk for Tesla, but we want to do the right thing for Chinese consumers,” the company claimed. “If we were to follow standard industry practice, we could get away with charging twice as much for the Model S in China as we do in the US. But we’re doing things differently, even if it means that some people might look at the price and mistakenly think it must mean the Model S has less value than its competitors.”

Aside from pricing, Tesla will have to make other breakthroughs if it is to reach its revenue targets this year. It has little sales presence in China, for example, although it is promising to open at least 10 new outlets this year. But a more complex challenge is how drivers are going to power their new cars. Free recharging has been marketed as a major benefit in other markets and Tesla has installed about 70 charging stations in the US that are said to be quicker at powering up cars than other public facilities (a full recharge from a ‘Supercharger’ takes about 75 minutes and the Model S can travel about 265 miles on it). Tesla started out in coastal cities first and then began to link longer routes. Coast-to-coast travel became possible in the US this week, although Tesla pioneers have to route through Wyoming and South Dakota to complete their trip from the Atlantic to the Pacific.

In China, Tesla is talking about coverage in six metropolitan areas, which sounds similar to the cluster strategy in North America. Next come the longer-distance links, with Beijing and Shanghai to be connected first (although there’s no mention of an implementation schedule).

But this assumes that Tesla will be able to develop and deploy its proprietary standard in China in the same way that it has elsewhere. That’s hardly a foregone conclusion in a landscape in which the power industry has been pushing hard to dictate technical standards for equipment, as well as installing charging infrastructure of its own. State Grid is said to favour battery switching rather than plug-in recharging, much to the frustration of domestic EV makers, who say the switching is unwieldy and difficult to manage. Carmakers are anxious about battery-charging too, worrying that the power suppliers will get a monopoly over the network.

Similar concerns make local media more circumspect about Tesla’s prospects in China. Influential local players like BYD haven’t had much influence outside their home bastion of Shenzhen, says Tencent News. Why does Tesla think it will get much say in how the charging network develops? Hexun.com agrees, noting that State Grid will install another 167 charging stations of its own this year. Will it be interested in helping a new entrant develop another system?

Tesla says the situation isn’t unexpected. “We’re beginning to speak with the folks [property owners and electricity providers] that we need to speak with. Every market has its peculiarities. We have a lot of experience with the heterogeneity of the problem,” O’Connell told reporters. Tesla was also rumoured to have started talks with State Grid last year on accessing its network, as well as running compatibility tests with pre-existing facilities. But it will have to come to an accommodation with the power giants if it is to have any chance of reaching its sales goals for the year. It should also tread cautiously, China Auto News advised this month. “To build a charging network in China requires approvals from many different authorities and departments, and Tesla will have to reconcile conflicting interests,” the newspaper warned. “A nationwide network involves sensitive issues including economic planning and national security. Tesla will have to be very careful.”

Keeping track: last month Tesla’s Elon Musk was in China to hand over the first nine Model S vehicles to Chinese buyers. We reported in issue 224 that charging infrastructure remains the biggest obstacle for electric carmakers in the China market. High upfront investment costs and low financial returns mean state utility providers have had little incentive to build the stations that carmakers are calling for.

But the state firm with the biggest say on this matter last week made a bold gesture. According to the Xinhua news agency, the Hubei branch of the State Grid will begin building charging stations for electric vehicles along the highways that connect Beijing to Hong Kong. Throughout the 1,500km link connecting Beijing to Hunan province, the State Grid plans to build an “intelligent charging service zone” at 38km intervals. That means about 40 of these charging stations are planned. Drivers need to wait 20 minutes to refill 80% of their vehicles’ electric power, the Xinhua says.

The State Grid will want to cooperate with the Southern Grid, in hope that the full 2,285km journey from Beijing to Hong Kong could be fully covered by charging facilities by 2015. (May 9, 2014)


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.