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Why Tesla Might Eventually Need to Cut Prices in China

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  • Today, Bloomberg reported that Tesla (TSLA) might reduce Model 3 prices in China by at least 20% next year. However, Teslarati has countered the claim.
  • Starting next month, Tesla plans to increase imported car prices in China. Next year could be crucial for the company as its China Gigafactory ramps up.

Tesla’s China operations have made news this year. In August, China exempted several TSLA models from its purchase tax. The move was significant as it came amid escalating US-China trade tensions. Giving privileges to a US company was the last thing expected from China back then. However, it was likely part of China’s strategy to boost EV (electric vehicle) penetration. Although China lowered subsidies for EVs this year, the country’s EV sales have plummeted.

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TSLA’s China operations

In August, TSLA increased car prices in China amid the Chinese yuan’s devaluation. Since it sold US-made cars in China, a weaker yuan hit its revenue in US dollars. That month, the US also declared China a “currency manipulator,” as the yuan fell against the US dollar. Trump talked about designating China as a currency manipulator in his 2016 campaign, but he backed out later. But as the Chinese currency fell below the crucial level of 7 yuan against the US dollar, Trump changed his mind. A weaker yuan boosts Chinese exporters’ global competitiveness.

China Gigafactory

In its third-quarter earnings call, Tesla shared images of its Chinese Gigafactory. The plant has progressed well and has even gained admiration from some TSLA bears. The Gigafactory could help TSLA bring down vehicle costs in China and help it escape tariffs. Tesla received more respite from China this month with reports the country would give subsidies for some TSLA vehicles. TSLA cars are not currently eligible for subsidies in China.

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Tesla’s Chinese car prices

Some reports indicate Tesla is planning to increase its imported Model 3 car prices in China next year. Bloomberg has reported that TSLA plans to cut prices for locally made Model 3s by at least 20% in the country. Meanwhile, Teslarati has countered the claim. It’s worth noting that such selective leaks and news from “familiar persons” are not new for TSLA.

Why could Tesla eventually lower car prices in China?

The Chinese auto market is price-sensitive, as demonstrated by its EV sales falling along with subsidies since July. Also, several automakers have lined up EV plans for China. TSLA will need to compete on price with other automakers, including Chinese EV makers such as NIO (NIO). Although NIO has been hailed as a “Tesla killer,” it hasn’t lived up to those expectations.

During Tesla’s Q2 2019 earnings call, Elon Musk said that he sees China’s Model 3 demand reaching 5,000 units per week in the long term. The company would have to become a mass-market player in China to touch that number, which doesn’t seem likely, given Tesla’s current pricing. However, considering that TSLA tweaked its pricing structure in the US when the federal tax credit was halved this year, a price cut to gain volumes in China may not be farfetched.

Elon Musk versus Jeff Bezos

Automakers are exploring several technologies to take on internal combustion engine cars. While Musk is betting on battery cars, some automakers, such as Toyota Motors (TM), are investing in hydrogen fuel cell cars. Furthermore, Amazon’s Jeff Bezos, who hasn’t been the best of friends with Musk, is also investing in flow batteries. To learn more, read Can Jeff Bezos Best Elon Musk with Flow Batteries?

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