Auto Industry


Tesla cuts prices – and NIO’s shares dive


Musk takes the stage in Shanghai

In China there is a view that he has “infringed consumers’ legal interests” (as one protest banner proclaimed). But back at home in the US, he thinks his own rights to free speech have been trampled by an over-mighty regulator.

Welcome to another week in the (never dull) life of Elon Musk, CEO of Tesla but no longer its chairman after being forced to stand down last year for tweeting misleading information. Last month Musk ran into more trouble for his tweeting – leading the SEC to seek a judicial ruling on whether he should be held in contempt of court. But in China the frustration is coming more from a cohort of clients that took delivery of the latest Model X car days before Tesla slashed prices.

One video of angry customers outside a Tesla store in Changsha in Hunan went viral across Sina Weibo, with irate drivers complaining that the reductions in Model X prices – to the order of Rmb200,000 ($30,000) – were completely “unreasonable” for people who had just paid a lot more.

Feng Shiming, an auto analyst at Menutor Consulting, told Global Times that Tesla doesn’t understand Chinese consumer psychology as price-sensitive buyers will now sit back and wait for more reductions.

Tesla also announced store closures (it has 64 in China) but then backtracked on the plan, saying it will hike the prices of higher-end models to compensate for keeping more of its outlets open.

How to explain the to and fro? The company says its price cut in China was in line with a pledge to reduce the prices of the Model 3 to $35,000 in the US and that cutting overheads (i.e. the number of stores) seemed the best way to support it.

Analysts worry that price cuts are symptomatic of falling demand and investors are perturbed as well, with Tesla’s stock price falling by a quarter this year.

And yet Model 3 sales continue to impress. Sales of electric cars in the US rose 81% last year to 361,307 units, with the Model 3 contributing 139,782 of the total.

However, the combination of the price cuts and impending production at Tesla’s new Shanghai plant (due to open in May) has also stirred speculation about a shake-out among Tesla’s Chinese challengers.

“The price reductions will put sizeable pressure on EV start-ups that are already, or will soon be, rolling out deliveries,” David Zhang, an independent automotive consultant, told the South China Morning Post. “As for those still dabbling with their first production model, it could be catastrophic and it’s very likely that they could die on the vine.”

“Not all [independent Chinese carmakers] will die, but neither can they all survive,” agreed Miao Wei, China’s industry and information technology minister, in comments reported by the China Securities Journal when he was asked about Tesla’s price cuts on the sidelines of the National People’s Congress .

NIO, one of Tesla’s main rivals in China, is already having a difficult time. After reporting its first full-year earnings since going public last year its shares have plummeted, losing almost half their value in just two weeks. The five year-old start-up hit milestones in delivering 11,348 cars last year but its net loss doubled to Rmb9.6 billion and it also slashed sales forecasts for the start of this year, leaving investors unsure about whether it will meet targets for the third and fourth quarters when its new ES6 rolls off the production line.

NIO then announced that it was cancelling the construction of its own Shanghai factory in favour of contracting out production to state-owned JAC. It put a positive spin on the news by saying that it would redeploy the savings in other areas and that the tie-up is in line with government policy, which wants startups to utilise existing production capacity at state-owned companies (see WiC438).

The bigger factor for the sector at large is government policy on subsidies. The authorities have plans to terminate subsidies for electric vehicles by 2020 and 30% cuts are scheduled for this year. This will force producers to look for lower costs, even as sales volumes grow.

For more on China’s electric vehicle industry see our extensive Q&A with XPENG Motors head of strategy Robert Bao in WiC443.

© ChinTell Ltd. All rights reserved.

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.