Is It Worth for Tesla to Add a Production Plant in China?

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The market in China for electric vehicles is very bright. China has emerged as the leader in both supply and demand for electric vehicles. In 2016 China had 45% of the electric vehicle sales worldwide. China has the world’s largest growth rate for electric vehicles. In 2016 China’s growth rate was more than 85% while the global average was 42%. Research shows that a majority of Chinese electric vehicle owners are willing to buy another electric vehicle again. Also, the number of Chinese consumers who say they are interested in purchasing an electric vehicle has tripled since 2011. China’s demand is not only impressive by the number of cars they sold in 2016 but also the variety of electric vehicles they had. In 2016 alone, around 25 new models came in, bringing the total to 75 electric models to choose from.[16] That is way more than any country has available by any measure.

A big reason why electric vehicles are popular in China is the numerous amounts of incentives the Chinese government has given. Incentives included traffic restrictions, reduction in vehicle purchase prices, reduction in registration restrictions, and parking benefits. Many larger cities in China encourage electric vehicles by exempting them from the lottery system used to award permits to own a conventional vehicle. It is very certain that China is in the electric vehicle in the long run. The amount of resources it has invested to kickstart the popularity of producing and owning an electric vehicle has been enormous. China will be a market and industry leader in electric mobility.[17] It is important to note that U.S has so many regulations that it makes it very costly to keep making cars in America. Complacency threatens the infantile electric car industry, many automakers are just building compliance cars and selling at a loss. This is just to check the regulatory boxes. China makes this process a lot easier by removing those barriers.

There are plenty of Chinese companies serving the electric vehicle demand in China. The government has done a lot to help grow the supply and demand of the electric vehicle market in China. There is definitely a great opportunity to become an electric vehicle supplier, but what are some obstacles that a new player must face? This is the question that Tesla must know and challenge when planning a huge strategic move like placing a Gigafactory in Shanghai, China. The competition in China isn’t certainly new, in fact many Chinese companies have already received news from public relations stating how those companies will challenge Tesla. A company CHJ automotive is already planning a new launch of the ultra-compact electric car priced at $8000 by early 2018 in China. CHJ automotive is hoping to capture customers that are commuting with e-scooters. Companies like CHJ automotive that build small electric vehicles exist in China and are a step ahead of Tesla. They offer the size and price in their models that Tesla does not have.

China’s biggest electric car maker BYD sold the most cars in 2016, beating out Tesla. However, Tesla reported more sales since the cars Tesla sold were mainly luxury class. BYD had 15% of the world market last year while Tesla had 11%. BYD dominates in China leading sales with 7 different models. Tesla managed to triple its sales there in 2016 to generate $1 billion in sales. Although BYD dominates the electric vehicle market in China, Tesla will have the advantage of offering a luxury style vehicle tailoring to a different class of customers. In addition, with the release of the Model 3 starting at $35,000 Tesla will have a fair share to compete with lower end customers. Not to mention how the lower costs of making an electric vehicle would also help Tesla. [18]

Some barriers of entry still exist to be a non-Chinese auto producer. All non-Chinese auto producers must form a joint enterprise with Chinese companies and must produce new electric vehicles. All technology developed by a joint enterprise is owned equally by the two partners, this is a huge advantage for China. New electric vehicles produced by the joint enterprise must have a Chinese brand name. The number of current players in the Chinese market are rather well established.[19] China has a confusing mix of pro-electric policies which is a challenge for global automakers. The majority of registered new electric vehicles are made by Chinese automakers. Foreigners must conform to these guidelines, however because the guidelines are not that strict the quality of Chinese electric vehicles is rather poor when compared to the world market.

My recommendation for Tesla would be to enter the Chinese market and its production factories with caution. There are plenty of advantages as to why Tesla would want to build a factory there. However, whomever Tesla decides to be their joint partner it would have to be a partner with great trust and ethical. I also don’t like the fact that the Chinese government has regulations that force companies to brand the country China into their models. With regards to regulations and guidelines in China, it is rather risky for an outside investor. It seems that China is heavily favoring Chinese electric vehicle automakers more. While it will most likely be cheaper for Tesla to produce in China, there are other alternatives in Asia to consider as well. Again, I am for it, but proceed with caution.

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