Will The Chinese Buy A Tesla?

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Will the Chinese buy A Tesla? The management of Tesla Motors, Inc. (NasdaqGS:TSLA) certainly hopes so.

At the Detroit Auto Show, Tesla announced its plans to open a dealership in Beijing — its first store in China — this spring. George Blankenship, the company’s vice president of worldwide sales, said the store will house an 8,000-square-foot facility, much larger than its U.S. stores, which typically have 2,500 to 3,000 square feet of floor space. “The China market is incredibly important to us,” Blankenship said. “We think our timing is perfect.”

2013 is an important year for Tesla. The maker of battery-powered Model S sedans has a goal of becoming profitable this quarter, with vehicle deliveries forecast to rise to a record 20,000 units this year. In fact, Tesla, which received $465 million in U.S. Energy Department loans to develop and build electric cars, is so confident about its prospects that it predicted it will repay the funds five years ahead of schedule.

Despite the confidence of management, though, the company has its doubters, as evidenced by the 50 percent short interest in Tesla’s stock. Production snags in last year’s second half boosted operating expenses and triggered a wider fourth-quarter loss for Tesla than analysts anticipated. Moreover, a recent New York Times article, Stalled Out on Tesla’s Electric Highway, has sparked a running feud between Tesla and John Broder, the article’s author. Tesla management admits that the article has cost the company $100 million in sales.

With pressure mounting to achieve its sales targets in 2013, where else to look for buyers but China, the largest automotive market in the world? The $64,000 question, though, that will only begin to be answered when Tesla’s Beijing showroom opens is: “Will the Chinese be willing to buy a Tesla?”

Tesla supporters cite a number of reasons for optimism. First, Beijing is enduring an unprecedented amount of smog, which has reduced visibility on many days to a few yards. Electric vehicles are seen as at least part of the solution for improving air quality. Secondly, The Chinese government wants to decrease the country’s dependence on imported oil, and electric vehicles effectively transfer fuel requirements from internal combustion engines that burn gasoline, to power plants that burn coal, which China has in abundance. Third, for these and other reasons, electric cars enjoy many favorable policies from the local governments. For example, Beijing has begun offering free license plates and a $19,000 rebate to private buyers of electrics. And finally, the luxury car segment is one of the fastest growing in China’s large and growing car market.

In considering all of the variables, however, it seems clear that, if Tesla is going to make it in China, it will have to make it as a luxury brand, not as an electric vehicle. At a base price of $59,900, Tesla’s Model S electric sedan already costs up to twice as much as a similar sized conventional car. Optional features can take the price to $100,000, and then a 25 percent import duty, 17 percent Value Added Tax and a Consumption Tax must be added before it reaches the consumer. At that price point, Tesla’s potential customers will be the wealthy individuals that have made China the world’s largest market for luxury brands.
Moreover, Tesla is not likely to benefit from favorable government policies in China because, for the most part, they are reserved for electric cars manufactured in the country. In order to promote sales of its Chevy Volt, General Motors has been urging the Chinese government to extend its electric vehicle subsidies to imported models since 2010, to no avail. Even if subsidies were extended, however, they wouldn’t be enough to move the Model S out of the luxury category.

As far as pollution, it’s not clear how large an impact electric vehicles would have on air quality in cities like Beijing. Because Beijing already requires that all cars being sold in the city meet Euro V emission standards, with other cities following suit, passenger cars are not really the problem. By the time a car achieves Euro V standards, emissions of NOx and particulate matter are negligible. The real culprits are diesel burning trucks and buses, many of which are still operating at Euro III emission levels, factories, and the coal fired power plants that will supply the electricity for the electric vehicles. The net result on air pollution of a large population of electric vehicles may well be negligible.

As a practical matter, sales of electric vehicles have been weak in China, and largely limited to government and corporate customers. “The government’s been trying to promote them [electric vehicles], but it’s not an easy sell,” said Tim Dunne, director of Asia-Pacific market intelligence at consumer-research firm JD Power and Associates. “While everyone [who does business with China] would like China to reduce their dependence on oil and reduce emissions,” Dunne said, “EV sales are anemic in most markets around the world.”

In the first three quarters of 2012, only 3,000 electric vehicles were sold in China. Global consulting firm McKinsey & Co predicts the Chinese market will remain mostly unchanged, at least for the next five years, as individual buyers continue to be indifferent to electric vehicles.

That leaves Tesla in competition with BMW, Mercedes, Audi, Porsche, Lamborghini, Ferrari, Bentley and Rolls Royce and other well established luxury brands that provide the “face” that every brand conscious buyer of a luxury car in China desires. Whether Tesla can do the same remains to be seen.

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