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INSIGHTS / THE BIG PICTURE

Chinese EV startups feel the heat as Tesla slashes prices, market subsidies ending

China · Apr 23, 2019 · By Wang Xiao'e

Tesla's recent price cuts and upcoming Shanghai plant for producing cheaper cars are increasing pressure on its Chinese rivals

Not all price cuts are welcomed by consumers.

In February, Tesla slashed prices on eight of its models in China by 8–29%, including on Models 3, S and X – a move that met with rage and protests. A group of Tesla owners even gathered at one of its stores, in Changsha, and put up a banner proclaiming: "Tesla’s willful price cuts violate consumers' legal rights.”

In China, where tariffs and taxes make owning a Tesla far more expensive than elsewhere, Tesla cars are a status symbol for the upper-middle class. No surprise, then, that these car owners are pained to see the value of their expensive cars plummet with the latest price cuts.

And Tesla owners aren’t the only disgruntled ones. Chinese EV makers – many of them in fact once inspired by Tesla – have also lost their price edge as a result. The ES8 model of NYSE-listed NIO, a major Tesla rival here, retails around RMB 448,000–456,000, little different from Tesla’s Model 3, now priced around RMB 412,000–522,000. 

“Tesla is the first choice for many Chinese consumers wanting a high-end electric car. The price cuts absolutely help attract more potential buyers who used to be deterred by its higher price tag,” said one Tesla owner.

NIO, also known as “China’s Tesla,” won’t be following suit though. Li Bin, its CEO and founder said: “We will not slash prices to get a larger market share, but will win consumers with our quality service.” 

More pain ahead

China is a key market for Tesla, accounting for 20% of its total sales in 2018. But Tesla's presence in the world’s biggest EV market is still minimal. Among the 1.26 million EVs sold in China last year, only about 13,000 were Teslas. Its performance was slightly better than NIO's 11,348 vehicles sold, but even then, that failed to earn Tesla a spot in the top 10 bestselling EV brand list dominated by established local EV makers such as BAIC Motor, BYD and Jiangling Motor. Chinese EV sales are forecast to rise to 2 million by 2020 and 5.5 million by 2025.

Just last month, NIO reported its net loss widened 92% to RMB 9.6 billion in 2018 from the previous year, and announced it would stop the construction of a new plant in Shanghai to improve its cash flowAccording to NIO’s IPO prospectus in August 2018, construction had already started then, with the aim of boosting manufacturing capacity for its ET7 and future models. 

In contrast, Tesla broke ground for its RMB 50 billion Gigafactory 3 in Shanghai in January 2019 for the localizing its production of Models 3 and Y. The factory is slated to start running by the end of this year, churning out 500,000 vehicles annually, which is about five times its current output in the US.

Local manufacturing will also bring the price of Tesla’s Model 3 even lower, to less than RMB 300,000, posing a threat to Chinese EV makers in the mid-range market like Xpeng and Weltmeister. Meanwhile, the Model Y will cost only about 10% more than Model 3, exerting pressure on high-end EV makers such as NIO and Byton.

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Subsidies ending soon

Tesla’s latest maneuvers didn’t exactly take its Chinese rivals by surprise, however. Elon Musk had expressly stated the company’s goal of offering mass-market affordable electric cars early on. For this purpose, Tesla has adopted multiple measures to lower costs, including the shift to online sales and the 7% staff downsizing in January. 

Last year, Tesla reported a drop of 15.4% in sales from China over 2017, partly a result of weaker demand after Beijing raised tariffs on imported vehicles from the US to 40% amid the US-China trade war. Its Model 3 retailed around RMB 240,000 in the US, but in China, its starting price was about double, at RMB 499,000. More recently, Tesla has said that its sales in China in the first two months of this year have more than doubled from the same period last year.

In fact, if Tesla wants to sell more cars in China, 2019 is a good year for it to start expanding aggressively. This year, the Chinese government has further cut subsidies for purchases of local EVs by 50% on average and plans to completely end them by the end of 2020. 

China’s subsidy policy for local EV makers can be traced back to 2013, when the government initiated an EV subsidy program to address exacerbating air pollution and energy security. To encourage the production and use of electric cars, both central and local governments have provided tax incentives to EV makers as well as generous subsidies, of RMB 60,000–120,000 per car, to EV buyers.

Starting this year, local electric cars also need to reach a range threshold of 250 km, compared with 150 km previously, to qualify for any subsidy. 

Notably this raises the heat on technologically less competitive EV startups, though pretty much every EV startup is feeling the pressure of falling subsidies. Xpeng has already increased the prices of its G3 models by RMB 20,000–34,000, or 15–20%, since February 1.

Chinese switching to EVs, foreign brands

The favorable government policy has helped fuel the rapid growth of China's EV market in recent years. In 2012, 12,552 and 12,791 electric cars were produced and sold in China, respectively; in 2018, those numbers had ballooned 100-fold to 1.26 million and 1.27 million, respectively.

There are other reasons more and more Chinese consumers are switching to driving EVs from conventional cars. They have also been motivated by rising gasoline prices and the difficulty of getting a license plate for conventional cars in several metropolises, which have restricted the issuance of license plates to limit the number of cars on road.

To own a gasoline-powered car in these cities, consumers have to participate in a bimonthly license lottery, with the chances of winning as low as 0.05% in Beijing. In Shanghai, they fork out US$13,060 on average to bid for a license plate. 

As the popularity of EVs grows, Chinese EV startups have found themselves also having to compete against foreign auto giants such as BMW, Volkswagen and Daimler. In 2018, BMW sold 23,384 electric models in China. By 2020, BMW iX3 electric SUV will be produced in China and sold globally. It also owns the largest public charging network in China with 80,000 charging piles in over 150 cities, as well as the largest EV sales network with over 330 authorized dealers in more than 130 cities.

According to Yale Zhang, managing director of auto-focused consultancy Automotive Foresight, these carmakers will pose an even greater threat to Chinese EV startups than Tesla in the next few years, given their better brand image and quality.

©NIO

More pressing issues

These challenges notwithstanding, Chinese EV startups first need to address the concerns foremost in consumers' minds – quality and security.

It’s a common problem in China that EV makers tend to claim a longer range than what the batteries in their cars can actually offer. Although NIO says its ES8 can reach up to 354 km of range, matching Tesla’s Model 3 Standard Range, some car owners have complained NIO’s model is capable of delivering a range of only about 200 km.

Batteries can cause even bigger woes. Over 60 severe electric car accidents have been reported in China last year, and 65% of them were caused by batteries. Other serious failures were also spotted. A NIO owner alleged the electrical system of his ES8 vehicle shut down while he was driving on the road.

Since most of Chinese EV startups don't have their own factories, they have trouble fixing the identified defects readily. These startups usually partner with traditional automakers for a shortcut to market, because it is challenging and time-consuming for these young businesses to secure a production license. But such partnerships have resulted in other issues, mainly in quality control and production adjustment. 

Beyond that, Chinese EV makers have no reason to be pessimistic though. As Tesla has told China Daily, it doesn’t intend to compete with Chinese EV startups since their offerings are quite different. Chinese EV startups may find themselves losing their price advantage, but they could still establish their brands by improving their vehicle quality and supporting services. Xpeng is building its super charging stations, for instance, while NIO has gone further by deploying 510 charging vans in over 95 cities. The mobile charging service, now open to all electric cars including Teslas, can be booked through NIO's WeChat mini program. 

And Tesla’s latest price reductions will take a toll on its sales in China at least in the near term, as potential buyers hold back their purchases in anticipation of further price cuts. Even after its Shanghai plant starts production, Tesla might still need time to adapt to its new business and operating environment. This will give its Chinese rivals some time to catch up.

Edited by Bernice Tang

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