On the afternoon of February 4th, two months after the resignation of Tesla China's former President Wu Bixuan, the new management team – GM Zhu Xiaotong, Engineering Services Director Wang Wenjia and Government Affairs Director Tao Lin – made their debut to communicate with the media.
At the press conference, Tesla China shared ideas on issues such as new development in 2015, challenges ahead and factory construction plans in China. As one of the media that attended, we believes that Tesla China is facing three pressures and nine issues, based on the conference proceedings and our long-term observations and research.
Pressure One: How to draw in the high-end market after the wave of disruptive innovation ebbs?
In 2014, Tesla's share price fell steadily from a peak of $291, bottoming out at $185.Though the price may have fallen in error, the market pressure caused by this is not insignificant. The culprit may not be the falling oil price (at this stage Tesla's potential customers are not oil-price sensitive groups) but the lower-than-expected sales. China was no exception, and declining sales in Q4 caused especially high concerns for Musk, which might be the real reason for former China President Wu Bixuan's resignation.
Hidden beneath the lower-than-expected sales is a larger market concern: as a fringe innovative product, can Tesla move onto the mainstream market after it gains a foothold in the fringe market – setting the trend and becoming a phenomenal mass product like the iPhone? This was part of the expectation reflected in Tesla's high-point $30 billion market valuation; if this expectation falters, its market value will shrink by several billion and could even disappear altogether.
There's only one way to assuage the doubt of the market: sell more cars and achieve better sales. The market is a cruel mistress. Once enjoying the dividends of public opinion brought by its game-changing innovation, Tesla is now faced with big sales pressures. When talking about the predecessor's resignation, GM Zhu Xiaotong said 'Iron Man' Musk is a workaholic. He takes on extremely challenging problems and also places high demands on the team. To a demanding mother, a score of 99/100 is not satisfactory. What a heavy burden.
To face the harsh challenges Tesla has a three-step strategy: to validate the feasibility and establish its preliminary brand with Roadster; to bring together high-end customers, gather experience and accumulate capital with the Model S (and also the SUV Model X, designed for a niche market); to penetrate the mainstream market with the mid-range priced Model 3. Leaving the high-end Model X aside, customers will have to wait until 2017 for the 200,000 RMB Model 3 to become available – meaning that for a long time ahead, Tesla's sales staff can only try to make a breakthrough by selling the Model S. Besides its early adopters such as Lei Jun and Wang Xiaochuan, Tesla has to compete for high-end consumers with giants such as BMW and Mercedes-Benz. Audi, BMW, Benz, Infiniti and now Tesla are bringing force to bear – it's no exaggeration to say this could be as gruelling as "The Battle of the Five Armies".
From the market position as a "high-end luxury electric coupe", outlined by Zhu Xiaotong's team, Tesla China is clearly straining under big pressures. Undoubtedly, "high-end" and "luxury" are marketing concepts in connection with luxury cars such as BMW and Benz, while "coupe" is an attempt to cover both business and home use. This awkward-sounding pitch suggests Tesla China expects to appeal to even larger target demographics.
In the marketing phase, Tesla China is faced with three issues:
1. How to attract target consumers of high-end luxury coupes without advertising?
2. While heavily relying on social marketing, how can Tesla compete for target consumers with long-established brands with solid market foundations such as BMW and Benz?
3. How to win over high-end consumers who have many options while Tesla very much depends on a single product?
Tesla hasn't revealed its sales targets. In the second half of last year, its Fremont factory was upgraded and the productivity there saw significant improvement – all vehicles made there are under contract to be sold.
Pressure Two: How can Zhu Xiaotong, who is thought to be good at infrastructure construction, make breakthroughs next?
Environmentally-friendly, economical, good performance…compared with traditional diesel vehicles, Tesla's electric coupe is far better. But it has failed to catch on over a short time. The inconvenience of charging the car has raised customers' concerns. After all, when compared with diesel vehicles' mature ecosystem of nearly a century, electric ecosystems are only just beginning.
For frequently used products like cars, the support system is very important. Electric cars can't run on dead batteries. With so many petrol stations in place, people have a strong concern about the relative ease of charging an electric car. Infrastructure construction is a big challenge confronting electric vehicles post-development and -manufacture, and Tesla is no exception.
Unlike in sales, Tesla China has made surprising progress in the construction of charging facilities. Zhu Xiaotong, who was previously in charge of charging facility construction, suggests that Tesla HQ and Musk have acknowledged the achievements in this area. According to Zhu, China now has the second largest number of superchargers (52) after the US. Combined with 800 destination charging poles, they are meeting consumers’ needs pretty well. In addition, Zhu emphasized, Tesla has installed home-use charging poles for more than 90% of owners, 80% of whom charge at home.
Our research on Tesla's site selection for supercharger and destination charger shows that currently the two major public charger networks are mainly located in east China. But the difference in density is clear: the density is distinctly higher in cities along the Yangzi River Delta, Pearl River Delta and in Beijing-Tianjin-Hebei. In other words, Tesla has preliminarily covered the three main economic regions. They have gathered at the sites of China’s richest and most farsighted, and will be important sales regions. Zhu said that in 2015 Tesla China would make more efforts in infrastructure construction, according to the principle "Cities Selected, Density Increased". We believes that Tesla will strengthen construction in core cities of the three main economic regions, gradually addressing the inconvenience of long-distance travel. Tesla China will try to get a higher market share of luxury cars in these regions and at the same time build brand reputation and develop market potential, gradually penetrating into smaller cities.
With a promising beginning, to take further steps in infrastructure construction Tesla China is faced with the issues below:
1. Most Chinese families live in housing estates, so can Tesla find a general installation plan jointly with property management companies to completely dispel concerns about charging at home?
2. The national standards of charging have been delayed; does Tesla have the budget to cover more cities before sharing with the state grid?
3. None can complete infrastructure construction all on its own, so how can Tesla gain more social resources for its construction teams?
When asked these questions, Zhu admitted that these were common issues faced by electric vehicles; Tesla cannot solve these problems on its own and more organizations and authority are needed. Engineering Services Director Wang Wenjia said that some social forces and capital have joined in infrastructure construction, and Tesla holds high transparency in this regard.
Pressure Three: Can Zhu's new team meet Musk's high expectation for the China market?
The Government Affairs Director Tao Lin said repeatedly to the media: "we are under big pressure, we hope the media can kick-start more appeal…" Her stress is quite understandable as Tesla hasn't yet been listed on the Catalogue of New-Energy Cars in Beijing.
In 2014, the number of new-energy car models (including hybrid electric vehicles) increased nine-fold, and as of January 2015, the production of China's new-energy cars increased by a factor of six. The government has clearly stated its increased support for new-energy cars. Support takes form in both preferential policies (such as those issuing free personal vehicle licenses in cities which restrict car purchases) and capital subsidy. Through efforts over the last nine months, Tesla received some subsidies – but they still need more, especially new policies introduced by different cities guided by central policies. This is the way to get level with other new-energy cars.
Building a good relationship with the government will undoubtedly make greater contributions to Tesla's development in China. Tao revealed that last year components purchasing costs reached $200 million, and Tesla would be happy to share patents and develop products with domestic components manufacturing companies. But there was also disappointing news: Tesla will not set up factories in China in the near future, shadowing its "contribution" to Chinese industry.
Besides a relationship with the government, as Tesla's second largest market after the US, the importance of the Chinese market has been confirmed by Tesla HQ. Zhu joked that in China Tesla would take the path of Chinese characteristics.
When referring to sales goal, Zhu revealed that Tesla China would start new services and strategies and, once accomplished, would aim to exceed those goals. Tesla will soon provide Chinese customers with portable charging devices, Tesla special chargers, to mitigate some problems. Though this is just a detail, considering that the Model S, with its new "Executive Seating", was designed for Chinese upstarts at the Detroit Auto Show, Tesla is indeed making efforts to win over the China market and its consumers.
In the coming years China is expected to surpass the US and become the biggest market for Tesla. But that depends on whether Tesla can really forge its own path – with Chinese characteristics. There are still three issues in that direction:
1. How to properly serve Chinese customers who are used to "out-of-date" services while adhering to Elon Musk’s direct sale strategy?
2. With its first Chinese factory in limbo, how can Tesla gain equal treatment from the government in the vein of Volkswagen and Daimler?
3. Musk is bold and resolute, and changes staff when goals are not reached (staff are also frequently changed at Tesla HQ): Will that work in Chinese markets where accumulated experience and guanxi are needed?
Translation by Du Yidan. Editing by Mike Johnston.