While markets are still grappling with the ill times tweet of Tesla Inc CEO Elon Musk of taking the company private, they also now demand that the billionaire now needs to focus on some of the other challenges faced by the company such as the fierce competition it is facing in China.
Announcement of setting up of a new giga factory in Shanghai, China with an investment of $2 billion was recently made by Tesla. China is arguably the largest market for electric vehicles in the world. The company aims to initially churn out about 250,000 annually of Tesla’s mass-market Model 3 sedans and battery packs and wants to double the capacity in some time.
Apparently, China is a fertile market for tesla as more than half of the 1 million units sold globally by the company was accounted for by the Chinese market.
The decision of the Chinese authorities of phasing out restrictions on foreign ownership in the car industry would also benefit Tesla. According to Alex Xie, a partner at the Boston Consulting Group, the US company would have full ownership of its Shanghai factory and hence the company would be able to better protect its core technologies and have better control over the production process.
According to estimates of John Zeng, director of China forecasting at consultancy LMC Automotive, Tesla would be more competitive as it will be able to keep prices low and therefor its cars would be more accessible for the growing middle class of China.
“Tesla really needs China,” Zeng says. “ If it doesn’t establish a bigger presence in China, then its position in the global electric-car market will be threatened.”
“Without a local partner, Tesla could be at a disadvantage when it comes to marketing and finding local resources.” says Wang of IHS Markit. “In China, the competitive pressure is much higher because everyone is setting their sights here.”
At present, that biggest seller of electric cars in China was Shenzhen-based BYD which sold 113,600 units last year. The company has the backing of billionaire investor Warren Buffett. Joint ventures in China have been set up by a host global car makers from Ford Motor to Volkswagen and such ventures have seen huge investments for developing electric cars. Most of these companies are enlisting local partners to aid in setting up of sales channels and for promotions.
By 2021, the electric car market of China would be very crowded and Tesla “won’t stand out as it does now because Chinese consumers will have many choices,” said LMC Automotive’s Zeng.
There is also enough access to capital for rivals of Tesla. For example, $587 million was recently raised by Chinese electric-car startup Xpeng against a valuation of $4 billion in a funding round. The investors in the company include the likes of Chinese e-commerce giant Alibaba, who are putting their bet on the company pone day shaping out to be the Tesla of China.
But there are certain advantages that Tesla enjoys over its rivals in the Chinese market.
“In terms of technology, Tesla still leads, but local players are catching up with Tesla’s operational ranges,” he says. “By 2020, the technology gap will be further reduced and Tesla’s advantage will be smaller.”
(Adapted from Forbes.com)