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Jon LeSage

Jon LeSage

Jon LeSage is a California-based journalist covering clean vehicles, alternative energy, and economic and regulatory trends shaping the automotive, transportation, and mobility sectors.

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Tesla’s Tipping Point: Breaking Into China

Tesla chief Elon Musk believes China be the tipping point that will lead to his company’s global domination of the electric vehicle stage, but it’s become a very tough sell.

China has had close to two-thirds of the booming global EV sales market so far this year — 61.8 percent with 872,000 units sold through September 30. Tesla’s US home market only made for 236,067 EVs sold this year — 16.7 percent of the total.

Another alluring point for Musk: Tesla is the first-ever foreign company to be granted a manufacturing plant in China without co-partnership with a Chinese company.

But the stakes are quite high for this to become a win-win for Musk. Tesla's new Shanghai plant started selling its first Model 3s on Friday, but the small electric sedans were given a starting price of Rmb 355,800 ($50,320). That’s roughly 3 percent less than the cost of the same model imported from the US with import tariffs sitting at 15 percent.

Tesla is going to be investing at least $5 billion in its Lingang production plant, the single largest foreign investment in Shanghai’s manufacturing sector. The electric carmaker broke ground on the plant in January and has set current prices on what’s needed for locally built Model 3 to be profitable.

Customers have much better window sticker prices to choose from, including rival BYD's E3 sedan selling for roughly $14,000. It’s going to be a tough sell with consumers feeling the pinch and holding off on buying new vehicles lately.

China’s “new energy vehicle” subsidies were cut by up to 60 percent this year and will be phased out by 2021. The country’s economy has been hard hit, and that won't be turning around anytime soon. EV and traditional gasoline engine vehicle sales have been way down this year.

Rising trade tensions and tariffs, a slowdown in China’s booming economy, and implementation of stricter emissions rules, have had their impact. LMC Automotive estimates 2019 will see a second straight annual sales drop in China.  Related: Is U.S. Shale Circling The Drain?

Car shoppers in China have been intrigued with Tesla’s Autopilot functions. While it’s far from the fully autonomous Teslas that Musk has been hawking for years, Autopilot is being sold to consumers for its ability to make drivers safer and have less stress behind the wheel. Traffic-Aware Cruise Control matches the speed of the electric car to that of surrounding traffic. Its Autosteer assists drivers in steering within a clearly marked lane and uses traffic-aware cruise control. Auto-lane changing and autopark are also appealing to car shoppers.

The company has been building fully self-driving capability into its vehicles as a future option for its vehicle owners. Tesla would agree with several Chinese officials, who have been championing autonomous vehicles as a future resolution for China’s increasingly traffic-congested cities and a rise in car crashes.

The company will have to overcome fears that have arisen after having a number of fatal crashes blamed on its Autopilot function.

Tesla also has a serious obstacle to overcome in effectively selling the Autopilot feature and future fully autonomous vehicles in that market. Baidu, China's search-engine giant, is clearly leading the path.

Baidu is getting the most test miles under its belt, which is critical in building public support for the new technology. In China’s capital city Beijing, eight firms drove a total of 153,600 kilometers (95,442.6 miles) through their autonomous fleets in 2018. Baidu saw 140,000 kilometers (86,991.9 miles) on the test route.  

It ties into the company’s pledge to lead the way, and best serve the country, in artificial intelligence. Baidu is hoping its Apollo open platform will become the benchmark for third-party developers to utilize its autonomous vehicle technology. Related: The End Of Syria’s “Pipeline War”

Tesla eventually will be able to lower sticker prices on its product offerings in China. Production costs are expected to decline, with the company reporting that its Shanghai factory was 65 percent cheaper to build than its Model 3 plant in Fremont, Calif. Labor costs will be lower in China than in the US, and Tesla is getting a tax break from China’s government for manufacturing its EVs there.

Tesla is hoping that its higher prices eventually stick with Chinese consumers — and car buyers in other key global markets — selling performance, safety, and all the benefits of owning an EV over a gasoline- or diesel-powered vehicle.

“China is by far the largest market for mid-sized premium sedans. With Model 3 priced on par with gasoline-powered mid-sized sedans (even before gas savings and other benefits), we believe China could become the biggest market for Model 3,” Tesla said in a note to shareholders Wednesday.

For now, traditional fuels are winning and Tesla has a long way to go in China.

By Jon LeSage for Oilprice.com

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