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Tesla China Fairy Tale For Bulls — How To Achieve Happily Ever After

All my talk this week about fairy tales started with the Tesla [TSLA] bear assumption that the Tesla factory in Shanghai was a huge mistake. Lack of demand in China following all of that investment would bring inescapable bankwuptcy soon. Really soon now. Any day. Really.

All my talk this week about fairy tales started with the Tesla [TSLA] bear assumption that the Tesla factory in Shanghai was a huge mistake. Lack of demand in China following all of that investment would bring inescapable bankwuptcy soon. Really soon now. Any day.

As usual, the bears’ assumptions were not based in facts or logic. To understand why the bulls’ fairy tale will leave Tesla living happily ever after, we just have to look at the facts and use some logic.

The first questions are, how big is the market and what prices are the Chinese willing to pay.

The total market is between 25 million and 30 million, depending on the year and which vehicles you count. The electric market is growing fast. In 2018, there were 1.1 million EVs sold in China. In 2019, the estimate is between 1.6 and 2 million. Slower growth of only 40% gives a market of 2.2 to 2.7 million in 2020. In the first year that Gigafactory 3 (GF3) will produce cars at full capacity, in 2021, the market will be above 3 million.

It’s no longer an exemption to see the monthly best selling EV cross the 10,000 delivery marker. In June, nearly 18,000 sales for the BAIC EU-Series was not even a record. In 2018, the first EV model reached nearly 100,000 sales. This year, 1 or 2 models will cross the 100,000 milestone. High volumes for EVs will not be a problem.

The real competition are of course fossil fuel vehicles (FFV) like the Mercedes C-Class (156,000 in 2018), the BMW 3 Series (134,000 in 2018), and the Audi A4 (168,000 in 2018). All three are more expensive, even before incentives, and are less “cool.” The Model 3 has better specs, as most people are starting to learn. In other markets with a developed electric segment, aside from Germany, the Model 3 can outsell these competitors. The market for this type of car, at even higher prices, does exist.

The second question, now that we know the market exists, is whether Tesla can reach the market.

I hear people argue that Tesla can be ordered over the internet, so what’s the problem? The problem is that most people like to at least see a car and preferably drive it a bit before deciding to buy it. And China is big. It is approximately as big geographically as the USA, with most people living in the eastern part. Think an extra 1.2 billion people east of the Mississippi/Missouri river. Traveling in China is often akin to an LA rush-hour traffic jam. If you live in Chicago and the nearest dealer is in Washington, DC, you might think twice about buying a Tesla.

Tesla has a number of stores in China, they are just not evenly distributed. The Tesla stores are mainly concentrated in three megalopolises, or super-city clusters:

• Shanghai and the Yangtze River Delta (population 150 million)
• Hong-Kong, Shenzhen, Guangzhou(Canton) (70 million)
• Beijing with port city Tianjin (130 million)

The same population as the USA in only three super-cities — that should make selling and service easy.

The other 1.1 billion Chinese have just 8 stores among them. The world’s largest city, Chongqing (30 million), has only a service center. The fourth megalopolis, Wuhang, with another 130 million potential customers, has one single Tesla store. This is absolutely not enough for over a billion people.

The market reach in China is about the size of the US population, with fewer stores and service centers than Tesla has in California. It helps that these three cities are the wealthiest parts of China. It also helps that China is a lot more positive about EVs than the USA, and Tesla is absolutely the coolest brand. Still, car sales per capita are a lot lower in China than in the USA. These three cities might not be enough to sell as many or more Model 3s in China than Tesla is selling in the USA.

The third question is about demand. When initial demand is met, can Tesla pull some big demand levers?

Tesla uses a number of marketing instruments to push sales and deliveries. We see that every quarter with the referral bonuses, call center and email floods to prospects, price and option adjustments, and discounts on older stock models. But these are ad-hoc.

Tesla is able to structurally grow its market reach fourfold in China. It just needs to open more Tesla dealerships, about 200 of them. That is 1 for every 5 million Chinese people currently outside the reach of Tesla. That would not only sell more Model 3s (and later Model Ys) from Shanghai, it would also increase the market for the Model S & X.

There is a lot of room to lower the price of the Chinese produced Model 3 SR+ and still have far better margins than on the Fremont cars delivered in California. The lever is there to be used.

The last question is how many can Tesla actually sell in China?

The Shanghai GF3 is intended to grow to 500,000 vehicles per year with only two models. Again, looking at the competition, Volkswagen has 1 model that does it solo, and another 4–5 that are around the quarter million mark. Volkswagen did work 30 years to reach these numbers, but now others can do it, too.

Full capacity with both models is still some years in the future. Next year, anything above 100,000 would be a big achievement. That production in 2020 is between 5–7% of the BEV market. With the initial wave of demand, the current market reach should likely be enough. Looking at other markets with high BEV market shares, like California, Norway, and the Netherlands, those sales numbers in this market size are ambitious, but not unrealistic.

For growth after 2020 and to reach the full GF3 capacity, Tesla has to invest in the sales, service, and supercharging infrastructure in China, aiming at 150,000 Model 3 SR+ cars delivered in 2020.

The Tesla future in China, with high margins, high growth, and high appreciation sounds like the happily ever after of a fairy tale. Don’t you think?

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Written By

Grumpy old man. The best thing I did with my life was raising two kids. Only finished primary education, but when you don’t go to school, you have lots of time to read. I switched from accounting to software development and ended my career as system integrator and architect. My 2007 boss got two electric Lotus Elise cars to show policymakers the future direction of energy and transportation. And I have been looking to replace my diesel cars with electric vehicles ever since. At the end of 2019 I succeeded, I replaced my Twingo diesel for a Zoe fully electric. And putting my money where my mouth is, I have bought Tesla shares. Intend to keep them until I can trade them for a Tesla car. I added some Fastned, because driving without charging is no fun.


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