Since its establishment in 2003, Tesla has aimed to create Electric Vehicles (EVs) for the wider market, focusing on practical value. This includes features like extended range, rechargeability, energy efficiency, reasonable pricing, and solid performance—all woven into modern design. Tesla strategically positions itself across market segments, addressing the premium luxury market with models like the Model S and Model X, while also targeting a broader audience with the more accessible Model 3 and Model Y. This approach allows Tesla to reach different consumer demographics and expand its presence in the EV industry.
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Since going public in 2010, Tesla has been leading the shift towards alternative power in the passenger vehicle industry. Yet, when venturing into the Chinese market, the company had to adapt its products to resonate with the local audience. Tesla strategically leveraged the latest technologies in China, rethinking its manufacturing and supply chain to tap into the market’s potential. Simultaneously, the brand crafted a distinct image, meeting the demands of both investors and customers by delivering high performance, usability, sleek design, and a sense of prestige.
Tesla in China is the “Apple of the automotive industry.” The government supported Tesla’s market entry with the aim of creating industry spillovers. The overarching goal was to elevate the domestic EV industry by leveraging Tesla’s market-leading capabilities and fostering the localization of EV design and manufacturing in China.
Tesla’s three top market objectives
Tesla had three objectives when entering the Chinese market. Firstly, to expand its share in the world’s largest EV market. Secondly, to stay independent of China’s requirement for foreign automakers to create joint ventures with Chinese manufacturers. Thirdly, to protect its intellectual property embedded in its expanding EV portfolio.
Investing in China marked a significant milestone for Tesla as it became the first foreign carmaker to operate independently with full ownership in the country. This was made possible by China’s amended Foreign Investment Law in 2020, eliminating concerns about forced technology transfers, a request long sought by international automakers like Mercedes-Benz, BMW, Ford, and Toyota.
China’s significance for Tesla
China is an important market for the automotive industry, particularly for EVs, due to its vast consumer market and strong central financial system. Being Tesla’s second-largest market, selling high volumes of EVs in China forms a significant part of Tesla’s business strategy.
The mature industrial chain, lithium-ion battery production, rare-earth metals, and electronics manufacturing make China an ideal hub for EV manufacturing. Since 2020, Tesla’s expansion in China, marked by the completion of the Gigafactory in Shanghai, not only spares the company from import tariffs on vehicles but also makes locally manufactured cars eligible for government subsidies. This development significantly strengthens Tesla’s global supply chain.
Shanghai Gigafactory’s role in Tesla’s strategy
Tesla’s Shanghai Gigafactory has been a game-changer in the EV market, compelling traditional manufacturers to elevate their offerings for Chinese consumers. The facility, which Tesla states was around 65% cheaper to build than its US Model 3 production systems, has the capability to handle the entire vehicle production process—from body assembly to painting to general assembly. This cost efficiency and in-house production contribute significantly to the competitive pricing of Tesla’s Model 3, aiming to dominate China’s mid-sized premium sedan market. Tesla’s strategic focus on increasing production and tapping into China’s extensive market with the Model 3 and Model Y highlights the pivotal role of the Gigafactory in scaling up their operations.
What makes Tesla’s marketing strategy different?
Tesla’s marketing strategy in China diverges from the traditional, as the company operates without a dedicated marketing department. Elon Musk emphasizes an innovative approach, allocating resources to enhance product quality and relying on the product to speak for itself, resulting in an unconventional “USD 0 marketing budget.” This strategy leverages Musk’s prominent social media presence and attention-grabbing moves, like sending Tesla into space, to generate buzz and visibility.
Despite lacking a traditional budget, Tesla’s marketing in China focuses on optimizing the customer experience, providing comprehensive online information, and streamlining the purchasing process. The company employs a referral program to encourage customers to share their experiences, fostering word-of-mouth marketing through interpersonal communication.
Elon Musk’s influential role in Tesla’s China strategy is underscored by his active social media presence, particularly on Twitter (even though it’s not available in China) and Weibo. Musk’s status as a newsmaker adds both celebrated and criticized dimensions to the brand, contributing to its visibility in the Chinese market.
1. Understanding Tesla’s supply and value chains
Tesla’s unique business model diverges from traditional automakers by owning the entire supply chain, from manufacturing to distribution. This approach is oriented towards reducing manufacturing costs and ensuring long-term sustainability.
2. Tesla’s complex management of battery packs
The key to sustainable EV development lies in advanced battery technologies and charging systems. Overcoming the short range limitation that deters many consumers, Tesla addresses this by integrating battery pack production into its value chain. Using a core technology that combines ordinary lithium batteries into powerful, stable packs, Tesla achieves success in long-range driving. The approach involves utilizing mass-produced, cost-effective lithium batteries originally developed for laptops, leveraging an established supply system and maintaining consistent quality. The result is evident in Tesla’s leading position for long-range electric vehicles, as illustrated in the integrated battery cell and packing production cycle.
3. A cutting-edge energy ecosystem emerges
The US EV automaker also realized the importance of being able to supply its own energy systems. That’s why Tesla is now developing a new energy supply ecosystem of superstations that produce their own energy and charging stations to be distributed across China.
4. Tesla’s direct sales approach and seamless customer experience
Tesla’s business model covers retail and distribution comprehensively, with direct ownership and internal management of dealerships, sales outlets, and vehicle repair and maintenance. Unlike the traditional franchised dealership model, Tesla opts for a direct sales approach, ensuring control over customer experience, channel touchpoints, and data. This strategy not only enhances customer interaction but also aids in new product development.
5. A dynamic approach to market sensitivity
Tesla’s pricing strategy is notably distinct within the automotive industry, characterized by a floating pricing approach that enables the company to adjust prices dynamically, diverging from the traditional model entrenched for over a century. Invented by Elon Musk, this strategy empowers the company to steer clear of the annual pricing norm and instead respond promptly to market conditions, sometimes adjusting prices multiple times in a year. The implications of Tesla’s pricing strategy emphasize two key aspects: the company’s ability to preserve product quality and the reduced price sensitivity of its customer base.
Tesla at a crucial crossroads: navigating the price drop in 2023
At the beginning of 2023, Tesla redefined its pricing, particularly with the Model 3 and Model Y. The Model 3 diverged dramatically from average vehicle prices, while the Model Y’s starting price plunged below the industry average by nearly USD 20,000. The US automaker was trying to offset declining demand, post-COVID factories slowdown, and growing inventory. The core idea was to pursue rapid growth with lower prices or opt for a more cautious approach to avoid jeopardizing stability.
Nevertheless, Chinese consumers were shocked. The price cut was indeed very significant, as much as 17% on certain models. Existing Tesla owners felt robbed. Leading anger and frustration brought hundreds of people to gather at showrooms and delivery centers in Shanghai, Chengdu, Henan, Wuxi, Hangzhou, and Shenzhen “demanding rebates and credit.”
Interestingly, comparing the consumer reactions across different countries, America especially, in China the unfavorable price changes actually sparked physical protest and proactive expression of disagreement.
The brand responded with no intention to provide any compensation to their clients, stating that the price cuts in China reflected engineering innovation, economic state, and consumption patterns.
Overall, the price reduction directly affected the brand’s reputation, but the results on the long-term value are still unclear. In terms of the market, it also impacted competitors and the demand to a different extent.
Tesla’s competitors in the Chinese EV market
Despite facing fierce competition in China from a mix of foreign and domestic automakers actively producing and selling electric vehicles (EVs), Tesla maintains a highly competitive position in the market. Notably, both the Model Y and Model 3 outperform numerous domestic models in terms of sales. Although Wuling’s HongGuang Mini EV held the top spot as of March 2022, Tesla’s Model Y and Model 3 secure the second and third positions in sales, showcasing their popularity.
Tesla’s unique floating business strategy in the Chinese EV landscape
- The US automaker strategically positions itself in China, offering premium luxury models like the Model S and Model X while also targeting a broader audience with more accessible options like the Model 3 and Model Y.
- Tesla adapts its products for the Chinese market by leveraging local technologies, rethinking manufacturing, and crafting a distinct image, aligning with the government’s goals for industry spillovers.
- Its key objectives in China include expanding its market share, maintaining independence from joint ventures, and protecting its intellectual property, achieved through significant investments and the establishment of the Shanghai Gigafactory.
- Tesla’s marketing strategy in China diverges from traditional methods, relying on Elon Musk’s social media presence and attention-grabbing moves, resulting in an unconventional “USD 0 marketing budget.”
- While consumer reactions to Tesla’s price drops may have been unfavorable initially, the long-term impact remains uncertain.
