Tesla Overestimates The China Market

tesla-china-614xaWanted: Head of China for Tesla, a $25 billion Wall Street darling whose “disruptive technology” provides Chinese auto buyers with an attractive, environmentally friendly product. This position offers the right candidate the opportunity to develop Tesla’s business in the China market, the size of which is expected to rival that of the United States in a few short years.

If there ever was a job posting to attract scores of smart, highly motivated, well-educated Chinese managers, this would be it. After all, the product itself — the Model S — is sexy with great consumer appeal; Tesla claims to offer a solution to China’s ongoing struggle with air pollution; and such a highly valued company can surely afford to pay a nice compensation package, including generous stock options.

Yet, despite all of these advantages, Tesla Motors, Inc. (NasdaqGS: TSLA) can’t seem to keep its China staff. In mid-December, Tesla confirmed the departure of Veronica Wu, the company’s former Global Vice President and China President, who had joined Tesla only nine months before from Apple, Inc. Wu’s predecessor, Kingston Chang, resigned in March, 2014, again after being with the company for less than one year. Late last week, June Jin, Tesla China’s Vice President for global business and Chief Marketing Officer for the Greater China region, announced that she has resigned from her post, after only five months with Tesla.

“Management churn” can be a difficult issue for any new company in China, no matter its prospects. Books have been written about the “management gap” that exists in the country and the efforts by multinational companies—often in vain– to recruit, develop and retain local management teams that can perform and meet a company’s expectations for the China market.

Make no mistake, Tesla has big expectations for China, and Wall Street considers sales in the country to be a linchpin in the company’s expansion strategy. Chief Executive Elon Musk is on record as saying that he expects that China sales could rival those in the United States as early as 2015, and that Tesla plans to boost annual production from a projected 50,000 cars in 2015 to 500,000 by 2020, with the United States and China as the company’s two largest markets. In January, Musk made an even more bullish projection that production would reach “a few million” cars per year by 2025. Presumably, China would contribute a big part of those sales.

Against these expectations, Tesla, by all accounts, is struggling. Musk has said that China sales were “unexpectedly weak” during the fourth quarter, and recent reports suggest that the company only sold 120 cars last month in the country. Musk believes that he has a management problem and is laying down the gauntlet with country managers. In an internal e-mail obtained by Reuters, the CEO recently said that underperforming company managers “will be asked to leave or assume a more junior role. This has already happened in China and will likely happen in some other countries, too.”

Management may or may not be the problem as Musk believes, but there is perhaps an even deeper problem for Tesla in China—Tesla and Musk may have simply vastly overestimated the size of the China market for its products. Yes, China has an air pollution problem, but electric vehicles, which so far only account for one percent of the almost 24 million vehicles that are produced each year in the country, are at best only a partial solution. No single company, including Tesla, offers a meaningful, comprehensive solution. And yes, there are a lot of rich people in China who can afford the $121,000 price tag for a Model S, but many of China’s affluent consumers may not even want to drive an expensive car, and those that do, have plenty of other models to choose from.
Porsche, which is a unit of Volkswagen, makes a perfectly good car and is arguably one of the most successful luxury sports car makers in the world. The company is 65 years old, but only started selling in China in 2001. Chinese consumers have learned to like Porsche, and in 2014, Porsche sold almost 47,000 units in the country, a 25 percent increase from the prior year. China is now Porsche’s second largest market after the U.S., and accounts for 25 percent of global sales. Porsche continues to see strong growth ahead as it plans to almost double its dealership network in China to around 100 by 2016 from the current 57.

As far as selling prices, the models that Porsche sells in China are in the same ballpark as those of the Tesla Model S. Prices for a Porsche in China range from RMB 558,000 to RMB 14.6 million ($89,000to $2.3 million, with the Cayenne series, priced at between RMB 922,00 and $2.8 million ($148,000 to $454,000), being the best sellers.

As a newcomer to China, with the added questions caused by the lack of a charging infrastructure in the country, Tesla and Musk would do well to benchmark companies like Porsche, grounding their expectations for the future in the realities of the Chinese marketplace. It took Porsche almost fifteen years and a great deal of hard work and brand building to reach sales of 50,000 luxury sports cars in China in 2014. Can a newcomer really do that in two years?

Announcing extremely aggressive –and I would argue unrealistic— goals for China may please Wall Street enthusiasts at the outset, but will surely disappoint later, as it already seems to be doing in Tesla’s case. Only when Tesla charts a more realistic China course will it be in a position to go about the very important, and very serious, job of building a highly qualified local management team in the country. In the end, companies that succeed in China are those that build solid local management teams over the long term. This cannot be done when managers are given goals that are simply unattainable.

Image: CNN

One Response to “Tesla Overestimates The China Market”

  1. Jack, once again nailed it.