Elon Musk Blinks; Tesla China Strategy Revamped Over Fierce Rivalry

Tesla is changing its marketing approach in China as fierce competition from domestic rivals and uneven demand puts its growth plans at risk.

Tesla recently upgraded its Shanghai factory to double capacity to about 1 million cars a year. (REUTERS)

Tesla Inc. is changing its marketing approach in China as fierce competition from domestic rivals and uneven demand puts its growth plans in the world's biggest electric-car market at risk. 

The EV pioneer has extended insurance subsidies of as much as 8,000 yuan ($1,100) for new buyers, according to a post on its Weibo account, reinstated a user referral program and even advertised on a local TV shopping channel -- a rare move for a company that's proudly eschewed traditional advertising avenues. 

The moves come after Tesla cut prices across its Chinese lineup for the first time in 15 months in October, as it faces a slew of headwinds there, from persistent Covid restrictions to more muscular local competitors. The prospect of more challenging conditions in China is adding to pressure on the carmaker's shares, which sank to a two-year low on Monday and have lost almost half of their value in less than two months. 

Tesla recently upgraded its Shanghai factory to double capacity to about 1 million cars a year. Yet in a sign the company is struggling to boost sales to meet those ambitions, wait times for cars in China have shrunk to as little as one week from as long as 22 weeks earlier this year. 

Failing to shift the extra production could endanger Chief Executive Officer Elon Musk's target of 50% annual global sales growth for years to come. 

“We can tell from the shortened lead time that the order intake for Tesla in China is insufficient,” said Wang Hanyang, an auto analyst at Shanghai-based 86Research Ltd. “The company is facing great competition from local competitors as well as lower consumer confidence. The promotions, including insurance subsidies, may also extend into next year.” 

Musk last month flagged that demand has been “a little harder” to come by due to China's property market slowdown and Europe's energy crisis, after the automaker reported lower-than-expected third-quarter revenue. Tesla shipped 71,704 cars from its Shanghai plant last month, down from a record high of 83,135 in September.

China is home to the most competitive EV market, with homegrown automakers such as BYD Co. -- which sold a record 217,816 vehicles last month -- and upstarts including Nio Inc. and Xpeng Inc. expanding their lineups. Domestic car companies accounted for almost 80% of EV sales through the first seven months of the year, according to China's Passenger Car Association. 

Local EV makers have also been adept at appealing to Chinese buyers, offering features like in-built karaoke systems and fragrance dispensers, as well as lavish customer service. Companies like BYD and SAIC-GM-Wuling Automobile Co. also offer a range of low-cost vehicles for budget-conscious drivers.  

Tesla isn't the only upmarket EV maker cutting prices in China. Mercedes-Benz Group AG last week slashed the cost of two electric car models by as much as $33,000 amid flagging sales. 

With a starting price of 265,900 yuan for the Model 3 sedan and 288,900 yuan for a Model Y SUV, Teslas have traditionally appealed to wealthier buyers in China's biggest cities. The company is now looking to attract drivers in smaller cities where EV penetration isn't as high. 

In a recent marketing campaign that was a first for the automaker, it asked would-be customers to nominate cities for the automaker to take cars for potential buyers to test drive, and offered some respondents use of a Model 3 for a week. Previously, it asked customers to travel to their nearest showroom for a test drive. 

Tesla also reintroduced its user referral program last month -- an offer that was dumped in the US last year. Owners who refer family and friends to buy a Tesla in China are rewarded with small gifts like wireless headphones or strollers, along with the chance to win a visit to the Shanghai factory or the free use of a Tesla for a year. Last month, the company closed its flagship showroom in Beijing's Parkview Green shopping mall. 

China's continued reliance on lockdowns and other Covid restrictions is impacting car sales, and that has seen Tesla pressured “to take immediate actions to promote sales,” Cui Dongshu, the secretary general of China's Passenger Car Association, said at a briefing earlier this month. 

Previously criticized by local media for being “arrogant” toward Chinese customers, Tesla recently surveyed owners in the country, asking questions about their preferred promotional offers and what services they expected as they wait to take delivery of their vehicle. 

“We expect a few more promotions to boost demand and max deliveries before year end,” said Junheng Li, chief executive officer of equity research firm JL Warren Capital LLC. 

Otherwise, Tesla's monthly new order intake in China might only be around 20,000 to 30,000 units after it normalizes in December, while Shanghai's monthly output is now about 80,000 to 85,000 cars, she said. 

A chief story for Tesla in 2023 will be “overcapacity,” Li said.