Feb 18, 2014 01:15 PM

Tesla Generates Buzz before Its Cars Even Arrive in the Country

(Beijing) – Tesla Motors Inc. is abuzz before it even hits the road in China.

The maker of electric cars said on January 24 that it would sell its flagship Model S car for 743,000 yuan. There had been expectations the price would be close to that for a Ferrari sports car – about 2 million yuan – auto information website Autohome said.

"People around me were cheering (when they saw the price)," a consultancy executive with knowledge of the industry said. "It truly was a surprise."

Tesla's plan to build a recharging network in the country boosted the share price of domestic companies making electric cars and batteries and other related stocks. Tesla shares on the U.S. Nasdaq had already been rising over the first nine months of 2013.

And the company expects more of the same. "Tesla will sell out in China," a Tesla salesperson in Beijing said. "Sales will surpass that in the United States."

Reservations for the Model S doubled after the price came out to about 600, he said. The Tesla dealership in Beijing opened on November 8 and is the only one in the country. The first batch of cars will arrive in June.

Despite the buzz, analysts doubt Tesla's high-profile arrival will hurt domestic makers of electric cars. Domestic firms – whose cars are eligible for subsidies that benefit buyers – because they have different business models and goals, said Tian Yongqiu, former editor of an auto magazine. Analysts say Tesla's real rival is BMW's i3 electric car, which the company plans to introduce in the country this year.

No Dealerships

Tesla said on its company blog that it could "get away with charging twice as much for the Model S in China" but chose to set it at the same level in the United States, "adding only unavoidable taxes, customs duties and transportation costs. We're not even factoring in the cost of the free-to-use Supercharger network that Tesla will build across China."

The pricing strategy and the blog article were both the work of company co-founder and CEO Elon Musk, said Veronica Wu, Tesla's vice president for China. "He was very insistent on giving Chinese customers a fair price," she said.

Wu, who was born in Beijing, worked as an executive at Motorola Mobile and Apple Inc. Usually foreign companies raise their prices in the China market due to risks such as the exchange rate, but Tesla decided to assume the risks itself, she said.

Independent auto analyst Zhong Shi said the strategy was smart. In the past, foreign car companies cared more about short-term profits, but Tesla is being farsighted in making its price structure transparent, he said. "No other car company had done for consumers what Tesla did."

Tesla also claims to be taking the moral high ground. "The real reason (our competitors') car costs more is that they make double the profit per car in China compared to the United States or Europe," Tesla's blog said.

It is well-known that Chinese pay two to three times more for an imported car than what people in other counties pay for the same vehicle. The price of the 2013 Land Rover Evoque SUV is US$ 88,000 in the United States, or 540,000 yuan. The same model costs more than 1.4 million yuan in China.

Two zactors enabled Tesla its price so low. Unlike most car manufacturers, it controls the final retail price because it does not sell through dealers. Zeng Zhilin, a general manager at LMC Automotive Consulting in Shanghai, said Tesla's production costs are significantly lower than that of companies making gas-fueled autos, which gives it a pricing advantage.

Tesla's strategy is also related to a government campaign to promote frugality among officials and a reduction in the number of luxury cars they drive, said Li Yuheng, a researcher at CIConsulting.

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