China's electric car market is
skyrocketing and Tesla needs the
world's largest auto market in order to succeed.
China produced half of global electric
vehicles last year. The United States
produced about 20%. China's clearly
way out in front of the United States
in terms of size and production scale.
Analysts are expecting that in around
five years, EV's and hybrids will
represent about 20% of the
overall vehicle market around the
world. Just the size of the Chinese
market is so appealing to anyone that makes cars.
China is one of the biggest proponents
of electric vehicles. In 2017, China
sold 777,000 new energy vehicles, a 53 % increase over 2016. And China is
expected to reach 2,000,000 EV's by 2020.
Since 2012 , there's been more than $60 billion in direct subsidies to lower
the cost of electric vehicles for
Chinese consumers. So by the time an
electric vehicle lands in a Chinese
driveway, it may cost as little as $10,000 to $12,000.
But Tesla has faced one big
disadvantage. In China, which is the
biggest market for EV's we have never
had any subsidies or tax incentives for
vehicles. Trade tensions that led to
high taxes for U.S. autos imported to
China have hurt Tesla's bottom line. An
$80,000 Model S in the United States
runs about $140,000 in China after
taxes. To succeed in the region Tesla
has no choice but to make its cars there. Once they can start
manufacturing domestically in China,
they can evade some of the costs of those tariffs.
They'll have a local supply chain setup.
It will just alleviate so much pain for them.
This is why Tesla broke ground on a new
factory in Shanghai this year and Elon
Musk is rushing to start production.
We need to bring the Shanghai factory
online. Our car is just very expensive
going into China for import duties, we
got transport costs, we've got higher
cost of labor here and we've never been
eligible for any of the EV tax credits.
Once the cars made there it is eligible
for that. The new Gigafactory is also
what will allow Tesla to offer the
Model 3 at an affordable price.
Bottom line is we need the Shanghai
factory to achieve that 10k rate and
have the cars be affordable. The
inhibitor is affordability. If we made
it more affordable, the demand is extraordinary. Allowing
foreign automakers to come in and own
their own factory and operate
domestically in China was huge for
Tesla. China's going to be a massive
theme for Tesla in 2019. So much of
their future business hinges on how
well they do in China. How quickly they
get that factory up and running.
The Chinese government has helped Tesla
tremendously by giving them a special
dispensation so that they can be an
independent foreign auto manufacturer
in China without needing a local partner.
Tesla's not required to have a joint
venture partner, it can own 100%
of its operation here. That's a real
nice break in timing for Tesla. It'll
allow them to control their operations
in China, which no other global
automaker has been able to do so far.
Just because Tesla is opening a factory
in China isn't a guarantee that it will be a success.
Tesla has to sell these products at a
profit. They still have to get the
consumer to fork over a huge amount of
money for their product.
But perhaps the biggest challenge Tesla
faces in China is steep competition
from established players. Companies
making EV's in China
they range from really large players
like BYD, which is backed by Warren
Buffett and BAIC, which is backed by
the Chinese government there. Porsche
has the Taycan, Jaguar has I -PACE, to
new players like NIO. Tesla's got a lot
of competition locally in China.
NIO is basically the pioneer. We're the
first with a premium electric vehicle
in China and the only other company
with a premium electrical SUV in China
is Tesla with Model X. Ours comes in
less than half the price. So we think
we compete very well and is customized
for the modern Chinese family.
It's a variety of long established
brands like General Motors, Volkswagen.
Ford is participating in this as well
but they have oftentimes paired up with
other Chinese based companies like BYD,
Geely, SAIC. Unlike the U.S., China's
EV manufacturers have focused on
creating short range, low cost and low speed electric vehicles.
With most coming in under $20,000. I
think their biggest risk will be to a
certain extent companies like NIO that
have a lot of cash and have invested a
lot in the design of their cars and
have some kind of interesting things
maybe that are the next level.
Aside from the larger automakers
numerous startups are also entering the
space. According to our own database,
there are at least 50 Chinese startups
in the electric vehicle spaces that's
phenomenal when you think about it.
Some of Tesla's biggest competition
however, could come from other foreign
luxury brands also entering the Chinese
market. Automakers like Porsche, Audi
and Mercedes are all releasing EV's in
2019 that will compete directly with Tesla.
A company like Mercedes has been in
China for a long time. They've got a
network to sell cars so they've got
this head start, especially on the
network part of it right. They've
already got their factories running and
then here comes Audi, here comes
Mercedes, here comes BMW with battery
electrics sort of for the first time. I
think there's no way they can't go to China.
You can't ignore a market of that size
especially if you're a luxury brand.
But even in a crowded market, Tesla
could still be a formidable player in China.
One thing Tesla has going for it in
China is the appeal of this Western
brand. They're an early mover in EVs.
They really made EVs into a luxury thing
instead of these little short hop kind
of golf carts. And the appeal of Elon
Musk is there too. He's a wild character.
He's an outspoken, unconventional CEO
and people are really committed to the company's mission.
You know they believe in it. The good
news for Tesla is that China is home to
the largest luxury car market in the world by far.
And Chinese buy twice as many luxury
cars as Americans do. More than two
million last year. So there's no
question the potential is there. It'll
come down to execution. Can they get
that plant in order and running quickly
and make sure the quality is there? The
Chinese will be forgiving on price but
not on quality. If there's any quality
issues, they can be punishing.