Electric carmaker Tesla, Inc. (TSLA) is on a charm offensive in China. Elon Musk, the company's CEO, recently lauded Chinese electric car makers, calling them "the most competitive in the world." He has also committed to increasing investments toward the manufacturing and research of electric cars in the country. His company has promised to build a data center in China to ensure that consumer data of its citizens does not travel outside the country.

Tesla's China tilt may seem surprising and belated after a relatively successful debut last year. But the company's efforts are an attempt to patch up relations with the ruling party and arrest a precipitous decline in its car sales in the country.

Key Takeaways

  • Tesla has made several recent moves to please the Chinese government.
  • The moves may be part of a broader push to reverse the spate of negative reviews and publicity the company has generated this year.
  • China is an extremely important market for Tesla.

 

Tesla has been buffeted by a spate of negative reviews and bad press this year. In March, customers protested outside its showrooms, claiming quality problems with its vehicles. Then, it was summoned by Chinese regulators who opened an investigation into its vehicles for quality issues. A fatal May crash between a Tesla car and a truck made matters worse. Safety issues are not the only problem plaguing Tesla in China. The country's military also banned Tesla vehicles from its facilities due to privacy concerns. 

The developments have taken the shine off sales for Tesla vehicles. During the period between March and April, sales plunged by 60% from the previous months, according to data from the China Passenger Car Association (CPCA). By August, they were down by 69%, and the company had made only 8,621 deliveries to Chinese customers. The remaining production at its Shanghai plant was made for exports.

Meanwhile, the number of competitors to Tesla has multiplied. They include publicly listed companies like XPeng Inc. (XPEV) and NIO Inc. (NIO). According to reports, the sales of these competitors have surged as Tesla has lost ground in China's electric vehicle (EV) market.

A Reversal of Fortunes  

Tesla's current problems represent a change in its fortunes from 2020. China rolled out the red carpet for the company. It was the only automaker allowed to wholly own its subsidiary in China, and the Model 3 became a best-seller in 2020. In a country where its Model 3s, which are targeted at economy passengers, are considered premium vehicles, Tesla received generous subsidies from the government. "We are currently the leader in the Chinese EV market. So, I think we must be doing something right," CEO Musk told analysts during a January earnings call. 

For all its woes, Tesla still leads the luxury car market for electric vehicles in China. It is also among the leaders in the overall EV market. The company's push to redress relations with the government is one among several initiatives to increase its presence and market share in the country. It has already released a cheaper version of its Model Y SUV Crossover for customers in the country. According to a report in January, the company is also planning to introduce a $25,000 car especially for the Chinese market.

China is already the world's biggest market for electric cars and is expected to maintain its lead in the near future. Tesla has said that it expects to have average annual growth of 50% "over a multiyear horizon" in the Chinese market. The CPCA has forecast a sales figure of 280,000 for Tesla in 2021.