Tesla in China

Tesla in China: Dominating the EV market with 0 marketing budget

Since its founding in 2003, Tesla’s vision is to manufacture mass-market Electric Vehicles (EVs) with compelling value propositions. This includes a long-range, rechargeability, energy efficiency, reasonable prices, and high performance without compromising design.

Tesla’s automotive segment comprises of the design, production, and sale of fully EVs. Tesla targets the premium sedan and SUV markets through its Models S, and Model X, and targets the mainstream automobile market through its Model 3 and Model Y.

A global leader in new energy vehicles

Since going public in 2010, Tesla has been leading the charge toward alternative power in the passenger vehicle industry. As of August 2022, Tesla has a market cap of USD 941.9 billion (RMB 6361.8 billion), making it the 6th most valuable company in the world. As such, Tesla is a major player in not only the global EV industry but the global automobile industry as well.

Globally, Tesla delivered 936,200 vehicles in 2021, compared to 499,550 vehicles in 2020, an 87.4% y-o-y increase. To date, Tesla has delivered a total of 564,740 vehicles in 2022. In 2021, Tesla delivered 911,208 mid-market Model 3s and Model Ys in total, accounting for 97.3% of all deliveries.  

Tesla is expected to add the Roadster and the anticipated Cybertruck to its currently existing model lineup. However, for Tesla in China, its growth strategy is mostly driven by the anticipated high demand for the Model 3.

Source: Tesla website, the Tesla Model 3

Tesla’s China Entry

What is unique about Tesla’s China market strategy?

For successful market entry into China, market entrants must rethink and redesign their products to take full advantage of new technologies available in China. That is what Tesla did with the EV, exploiting advancements in manufacturing and supply chain only available in China.

On the demand side, Tesla established a strong brand image, satisfying investors’ and customers’ appetite for products that have strong performance, useability, design, and also prestige.

Tesla’s three China 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. And thirdly, to protect its intellectual property built into its growing lineup of EVs.

For Tesla, investing in China was a major turning point. Tesla became the first foreign car manufacturer approved to operate fully independently while still retaining 100 percent ownership in China. Given that China amended its Foreign Investment Law in 2020, Tesla does not need to face concerns regarding “forced technology (IP) transfers” of its patents. This arrangement was something that auto-makers such as Mercedes-Benz, BMW, Ford, Toyota and other international carmakers have been requesting for years. 

Source: Rakuten Insight, Influencing factors to prefer an electric car in China

Tesla’s Fit in China

Why China?

China is an important market for the automotive industry, particularly for EVs, due to its vast consumer market and strong central financial system. China is Tesla’s second biggest market and selling high volumes of EVs in China is a large part of Tesla’s business plan.

China’s mature industrial production chain, and lithium-ion battery production capacity also make China an ideal location for manufacturing. Furthermore, China’s rare-earth metal production and electronics manufacturing capabilities, are crucial for producing core EV components (batteries, electric motors, and electric controls).

Tesla in China grew significantly past 2020 after completing its Gigafactory in Shanghai in late 2019. This is beneficial to the company for two reasons. Firstly, because production in China spares Tesla from import tariffs on finished vehicles, and secondly, its locally made cars qualify for government subsidies. Because China is an important supplier of automotive parts for the global industry as well as a hotbed for electric mobility and smart grids, it has been the perfect place for Tesla.

How the Shanghai Gigafactory Plays into Tesla’s Supply Chain Strategy

Tesla is not owned by China, however, Tesla’s Shanghai Gigafactory is a competition “game changer” in the EV market as it puts pressure on traditional groups to offer high-quality battery-powered models to Chinese consumers. Tesla said the Gigafactory in China was approximately 65% cheaper to build than its Model 3 production systems in the U.S., and that the facility could produce full vehicles from the body to paint to general assembly.

China is by far the largest market for mid-sized premium sedans. Thus, with the Model 3 being priced on par with gasoline-powered mid-sized sedans (even before gas savings and other benefits), Tesla believes China can become the biggest market for the Model 3. As a result, Tesla indicated its intention of ramping up production and tapping into the lucrative Chinese market with its Model 3 sedans and Model Y cars.

Construction of the Tesla Gigafactory was done to increase production volume to the maximum and enjoy economies of scale. However, for this to work sales must increase significantly to justify such a strategy.

Why Tesla’s China marketing strategy succeeded where others failed

In the past, other players in the industry tried similar strategies that ended up failing. Tesla’s goal is to develop a new car in less time than their other competitors. To do so, they need a faster and more agile supplier base than anyone else. Therefore, Tesla has done something different from its competitors: it is building its own market.

This large facility, which is sufficient to produce half a million Tesla vehicles annually, will be completely powered by renewable sources.The rationale behind the plant is to reduce the price of battery production for domestic consumption.

Tesla is one of the most important and well-rounded players in the Chinese automotive industry in alternative fuel sources and sustainable mobility.

Assessing the current position of Tesla in China

Why did China fully support Tesla’s entry into the Chinese EV market?

Tesla’s China entry signified the Chinese government’s efforts to attract an influential foreign company in the EV sector. This was done to improve market openness, prompt innovation from domestic Chinese players, and to stimulate the interest of the global capital market.

Ultimately, China aims to drive the domestic EV industry to new heights, using Tesla’s market leading capabilities to localize of EV design and manufacturing within China.

China’s manufacturing process can help Tesla overcome the “production hell” it suffers in factories in Texas and Germany. Therefore, the Chinese government’s EV ambitions give Tesla a tailwind that it lacks in elsewhere.

What is China’s stance on Tesla and vision on its significance for the Chinese domestic EV industry?

China sees Tesla as the “Apple of the automotive industry.” By allowing Tesla into its market, the Chinese government is attempting to recreate the effect Apple had on the Chinese tech industry. Apple expanded China’s industrial chain and created technology spillover that caused Chinese tech companies such as Huawei and Xiaomi to become more competitive. In essence, China supported Tesla’s market entry with the aim of creating industry spillovers.

He Xiaopeng, the founder of XPeng Motors, stated that Tesla’s presence in China would be a positive force for the development of the domestic EV market. In this instance, China is hoping Tesla’s entry will trigger similar reactions and help accelerate the country’s transition to EVs. Chinese manufacturers are currently focused on two areas: auto parts and smart electronics, but they have yet to reach the core of Tesla’s industrial chain, both in scale and technology.

What Makes Tesla’s marketing strategy in China different?

What is Tesla’s China market strategy?

Tesla does not have a traditional marketing strategy in China. In fact, the company has no marketing department. According to Elon Musk, Tesla’s innovative marketing strategy is “$0 Marketing budget”.

Source: Tesla SEC filings via Visual Capitalist, Expenditure Per Vehicle Sold on Marketing vs R&D of automobile manufacturers

However, despite not having a budget, there are some elements that make Tesla’s marketing strategy in China special. First, Tesla aims to optimize the customer experience. All information about cars is available on the website and the whole process of buying a car takes place online. This is especially important during COVID-19. Also, instead of paid advertising, Tesla’s marketing strategy in China involves a referral program. People share their experiences of buying and using Tesla, attracting new customers.

Elon Musk’s personality is also important for Tesla’s marketing strategy in China. He is active on social media, particularly on Twitter, and has been one of the top newsmakers in recent years. Elon Musk is a controversial figure amongst Chinese netizens, both celebrated and criticized for his opinions and actions.

Tesla also uses word-of-mouth marketing strategies, which are necessary to penetrate the Chinese consumer market. Tesla focuses on creating high-quality products, and relies on consumers to market their products by communicating with each other.

Lastly, transparency is also important for Tesla in China. Company representatives always share with consumers what happens if a problem happens, which raises consumer trust in the brand.

1.    Understanding Tesla’s Supply and Value Chains

Tesla’s business model differs from those of most traditional automobile manufacturing companies because it owns the entire supply chain from manufacturing to distribution. This strategy is driven by the goal of lowering manufacturing costs, thereby assuring the business’ sustainability. Tesla’s supply chain management strategy focuses on a long-term growth strategy involving production, inventory management, and distribution.

As Tesla builds entirely new types of cars and possesses a completely redesigned manufacturing process, it has taken nearly complete control over the industrial value chain. The flow chart below shows the integration of Tesla’s supply chain.

Source: SAGE Journals, Tesla’s highly integrated business model

2. Tesla’s Complex Management of Battery Packs

The key to the sustainable development of EVs lies in battery technologies and charging systems. The short range of EVs has deterred many consumers who fear running out of power on the road. The battery is the first important problem encountered in EV innovation and is the crux of EV technology.

To provide a solution to this problem, Tesla’s value chain capture includes the production of battery packs. Tesla attempted to solve these issues from the outset using a core technology of combining ordinary batteries into a powerful, stable, and large-capacity battery pack. Instead of developing a dedicated large battery, Tesla used mass-produced lithium batteries developed for laptops that have a well-developed supply system, are low in price, and are of consistent quality.

This proved successful as Tesla vehicles hold the number one place in long range driving. Below is a chart displaying the integration of the battery cell and packing into the EV’s production cycle.

Source: SAGE Journals, organization structure of batteries into Tesla’s business model

3. Tesla’s Efficient Energy Ecosystem

Tesla also realized the importance of being able to supply its own energy systems. 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. Retail and Distribution

The Tesla business model captures all aspects of retail and distribution, meaning it owns all its dealers and sales outlets as well as internally handles vehicle repair and maintenance.

Whereas on the other hand, traditional OEMs rely on a pronged selling network with one-brand and multi-brand dealers. Tesla goes against the typical franchised dealership model, deciding to use a direct sales model. In this way, the company not only controls customer experience, but also owns the channel touchpoints and data, assisting with new product development.

5. Sales and Pricing

Since the government has subsidies for EVs, some Tesla models are cheaper in China. For example, the Model 3 sells for RMB 235,900 (USD 36,500), compared to the US Model 3 price of USD 39,990.

Online-only sales are ill-suited for most dealers but have been done successfully by Tesla. This sales model allows for fixed pricing, where the retail price of the vehicle is the same at no matter what point you buy it from in the Tesla network. This separates Tesla from the market because, for other OEMs, they’d need to at least get to a point where consumers feel like they’re getting value from the brand. This pricing and distribution strategy gives Apple quality and feel.

6. Customer Segment

Tesla’s customer segment is vastly different to other carmakers. Most carmakers enter the multi-purpose economy or specific-purpose market. The ownership cost for EV is high.

Because Tesla continues to offer an SUV version luxury multi-purpose car, followed by a more economical multi-purpose car, it corresponds to the strategic goal of creating an affordable mass market EV. The customer segments of battery and recharging systems need to match the customer segment of vehicle.

The transnational homogeneity of these market segments means Tesla faces low pressures for local responsiveness and can offer a standardized product with minimum differentiation across markets. Tesla’s market segmentation is revealing of its high-end disruption innovation model.

7. Cost and Value

The competitive car industry has placed pressure on cost reduction, pushing Tesla to increase its products’ perceived value. By creating value-added services through a global network of stores, service centers, and Superchargers, the company supports customers in their purchasing decisions and reduces the switching costs of buying EVs.

On the other hand, developing unique core competencies in powertrain engineering and energy storage has enabled Tesla to price its product at a premium. Finally, over-the-air software updates allow Tesla to limit its products’ obsolescence, strengthening their value-for-money.

In sum, Tesla can be labeled as a value-driven business that aims to offer best-in-class technologies, so that customers are willing to pay more for Tesla’s products.

Highlights of Tesla’s strategy in China

Vertical integration helped Tesla maintain control of all the key design details. Tesla also vertically integrated its retail sales channel and built its own network of charging stations.

In essence, Elon Musk’s China strategy is to increase car production and to expand Tesla’s charging infrastructure to accommodate increasing the number of Tesla cars on the road. By producing the energy that power its vehicles, Tesla anchors itself in the automotive industrial energy and value chain.

Explaining the success of Tesla’s China market strategy

Timing and vision played a significant role in Tesla’s success. Tesla was one of few pure EV car makers globally in the mid-2000s and probably the first to develop a robust EV powertrain and battery pack. The company was a first mover in betting that lithium-ion battery costs would continue to decrease for many years to come. Tesla’s unique branding also enabled it to distinguish itself from other car-makers and attract loyal customers. Furthermore, Tesla’s business and operational model seek to address the key problems Chinese vehicle buyers have with EVs.

Source: Rakuten Insights, Influencing factors deterring purchases of electric cars in China as of 2019

Tesla’s Competitors in the Chinese EV Market

Tesla faces steep competition in China from a mix of both foreign and Chinese automakers that are already manufacturing and selling EVs. However, Tesla does have a key advantage in China, as the Chinese government has allowed Tesla to be an independent foreign auto manufacturer without needing a local partner.

Chinese automakers have benefited from some $60 billion worth of subsidies and incentives since 2012, designed to make new energy vehicles affordable for Chinese drivers. This has included research-and-development funding, tax exemptions and financing for battery-charging stations. Meanwhile, non-Chinese automakers, including BMW, Mercedes, Audi and Toyota, have already established a beachhead in Asia, with manufacturing and sales there conducted through a variety of partnerships and agreements with local entities.

Domestic competition in China’s EV industry

EV makers that are already up and running in China include: NIO, which went public in September 2018, Warren Buffett-backed BYD, SAIC Motor, a partner of Volkswagen and GM, Geely Automotive Group, BAIC Group, and its subsidiary Beijing EV Co. Besides these, a group of EV start-ups are on the rise in China which includes Byton and WM Motor Tech.

Source: CleanTechnica, Best-selling EV models in China as of 2022

Tesla’s EV sales are highly competitive in the Chinese market, with the Model Y and Model 3 beating many domestic models in sales. As of March 2022, Wuling’s HongGuang Mini EV leads the market, but Tesla’s Model Y and Model 3 are the 2nd and 3rd best sellers in China, respectively.

However, overall, Tesla’s market size lags behind domestic giant BYD, and the SAIC-GM-Wuling joint venture.

Source: CleanTechnica, EV brands market size in China as of 2022

Competitor 1: GAC

State-owned manufacturer GAC was founded in 1954 and sold a total of 535,000 units and maintains a market share of 4% in 2021.

The company produces and sells vehicles under its own brandings, such as Trumpchi, Aion, Hycan, but also under foreign-branded joint ventures such as GAC-Toyota, GAC-Honda, GAC-FCA (Jeep) and GAC-Mitsubishi. It also produces EVs under some of the previously listed brandings, including dedicated EV brands such as Aion and Hycan.

Source: Business Insider, the GAC Aion

Competitor 2: Chery

Chery Automobile was founded in 1997. In 2021, the manufacturer sold a total of 109,028 units, achieving a market share of 4.7%.

Chery is best known for its BHV ultramini hatchback, the Chery QQ Ice Cream. The model is one of the cheapest EVs on the market. Today, it is the sixth best-selling EV in China. As of December 2021, the hatchback retailed for RMB 29,900.

Source: Business Insider, the Chery Ice Cream

Competitor 3: SGMW (SAIC-GM-Wuling joint venture)

SAIC-GM-Wuling, also known as SGMW, is a joint venture between three companies: SAIC Motor, General Motors, and Liuzhou Wuling Motors which was formed in 2002. In 2021, SGMW sold a total of 452,000 units, and has a market share of 10.2% in 2022.

The company’s Wuling Hongguang Mini EV, a microcar, remains the best-selling plug-in vehicle in China in 2022. In 2021, the Hongguang Mini EV sold more than 161,500 units from January to May. The model cost at RMB 28,800 (USD 4,104) making it the cheapest electric vehicle in China.

Source: Business Insider, the Wuling Hongguang Mini EV

Competitor 4: BYD

BYD, founded in 2003, is China’s top EV manufacturer. The Guangzhou-based conglomerate sold 593,743 units in 2021, and as of 2022 has a 25.3% market share in China, far outstripping its competitors.

4 of the 10 best-selling plug-in vehicles in China in 2022 are made by BYD. The manufacturer creates both battery-powered electric vehicle, or BEV, and plug-in hybrid electric vehicle, or PHEV, versions of many of its plug-in vehicle models.

The BYD Song PLUS EV, followed by the BYD Qin, are BYD’s best sellers.

Source: Business Insider, the BYD Song PLUS EV, BYD’s best-seller

Key Takeaways on Tesla in China

  • Tesla was able to perceive where the EV industry is heading, enabling management to identify critical capabilities and bottleneck assets that need to be acquired or enhanced.
  • Support and authorization from the Chinese government are critical for foreign automakers to enter the China market.
  • Tesla was allowed to enter the Chinese market as it brought value to the Chinese EV industry, like Apple and the consumer electronics market.
  • Tesla’s marketing “strategy” of not marketing worked well in China, where word-of-mouth spreads quickly provided that the product is valuable to consumers.
  • Direct-to-consumer sales channels worked well for Tesla in China, as it allows Tesla itself to utilize fixed prices as well as solve customer issues directly.
  • Tesla is not leading in market share in China, as it faces strong competition from local brands which may receive more care from the government.

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