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Will Tesla and Volkswagen Go Head-to-Head in China?

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Tesla (TSLA) has just begun trial production of the Model 3 at its Shanghai Gigafactory 3. However, it’s set to face stiff competition from Volkswagen (VLKAY), which also plans to go big in China.

According to a Reuters report, Volkswagen plans to grow its electric cars’ market presence with a focus on China. The company aims to produce 1 million electric cars by 2022. In China, it expects to produce about 600,000 vehicles via its two plants. It seems like China is set to become a key battleground for EV (electric vehicle) manufacturers.

Tesla’s Gigafactory 3 has an annual production capacity of 150,000 units of the Model 3. The company plans to ramp up production at the site by mid-2020. It can also produce 350,000 Model 3s at its Fremont site. Overall, the company has the global capacity to produce 500,000 Model 3 units. Plus, Tesla can produce around 90,000 Models S and X at its Fremont site.

Tesla and Volkswagen: EV price competition

Volkswagen plans to use the MEB (Modular Electrification Toolkit), a modular system, to manufacture EVs. MEB allows the company to scale up production efficiently, reducing the cost and price of an EV. According to Reuters, Volkswagen could price its EV as low as $22,262.

This price could give stiff competition to Tesla’s Model 3. Just ahead of Tesla’s third-quarter earnings release, the company raised its prices on the Model 3 in the US. It increased the price of the Standard Range Plus version of the Model 3 by $500 to $39,490. Its High-End Performance version’s price was raised by $1,000 to $56,990. Its Long Range version is priced at $47,990 on its website.

According to an Electrek report, Tesla plans to sell its made-in-China Model 3, the Standard Range Plus, with an Autopilot feature for about $50,000. Reportedly, this is about 3% lower than the price of its imported version in China.

China: A crucial market for EV makers such as Tesla, Volkswagen

China’s auto industry is observing a trend that showcases how the global auto market is changing. China’s sales of traditional gasoline and diesel cars are falling, whereas those of EVs are ramping up.

According to a Bloomberg report, sales of alternative energy passenger vehicles rose from 233,700 in January 2016 to 1.5 million in August 2019. In the same period, all passenger vehicle sales rose from 21.4 million in January 2016 to 25.3 million in June 2018 but dropped to 21.8 million in August 2019.

It’s no surprise EV manufacturers such as Tesla and Volkswagen are ramping up operations in China to nab a piece of this growing EV market.

The report also pointed to the fact that most companies that have high EV dollar sales are from China. Excluding Tesla, five of the top ten companies by EV revenue are Chinese. In fact, in terms of percentage of EVs to total sales, nine of the top ten companies are Chinese.

Ford and GM in the Chinese market

Leading automakers Ford Motor Company (F) and General Motors (GM) are trying hard to make inroads in the country.

Ford is struggling in one of the most important automotive markets. In the third quarter, Ford’s China vehicle sales dropped by 12% YoY to 134,000. However, the company is working aggressively to revamp its operations in the country.

In April, the company announced its restructuring plan, Ford China 2.0. The plan provided a blueprint for the reversal of its position in China via the reorganization of its business and a focus on its core market segment.

General Motors is also struggling in the Chinese market. In the second quarter, the company saw a $48 million operating loss in its International segment due to lower earnings from China.

On GM’s second-quarter earnings conference call, CEO Mary Barra said, “GM China headwinds in the quarter include lower volumes, significant pricing pressure, regulatory changes, slower sales of our outgoing models, and shifting customer preferences.”

Fiat’s and Ferrari’s operations in China

Fiat Chrysler Automobiles (FCAU) has overhauled its China joint venture structure and leadership to improve its performance in the country. The company is focusing on cost reduction, inventory planning, and product planning processes to increase its earnings in the region.

Finally, Ferrari (RACE) is seeing improving sales in Mainland China. In its second-quarter earnings press release, Ferrari stated, “Geographic mix shifted in favor of Mainland China as a result of the decision to accelerate client deliveries in advance of the early introduction of new emission regulations as was the case in the first quarter.”

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