Tesla may still be the world’s largest battery electric vehicle (BEV) producer, but the US carmaker is facing increasing troubles in China – the largest BEV market in the world.

The Chinese new electric vehicle (NEV) market, which includes BEVs, plug-in hybrids, hybrids and range-extender electric vehicles, is highly competitive.

According to the country’s Ministry of Industry and Information Technology (MIIT), over 9.58 million NEVs were produced in China last year, with sales exceeding 9.49m units. The volumes represent on-year increases of roughly 36% and 38%, respectively. As a result, the NEV penetration rate climbed to 31.6% from 27.6% in 2022.

This growth, however, is accompanied by intense competition in a margin-shrinking price war. Despite Tesla’s leading role in price cuts, as part of its strategy to focus on volume over margins, its brand image in China seems to be changing.  

Giga Shanghai performance

Tesla said in its earnings presentation last week it experienced a number of challenges in Q1 2024, from supply disruptions due to the Red Sea conflict, an unplanned shutdown at Giga Berlin due to an arson attack, to the global slowdown in EV demand. Its global deliveries in the period dropped 9% year-on-year.

Though the carmaker doesn’t disclose volume by region, data from the China Passenger Car Association (CPCA) shows its sales volume in China (including exports) declined 3.7% y-o-y in Q1 to 220,876 BEVs.

The decline isn’t isolated to Tesla, as other leading carmakers such as Xpeng, Hyundai and Volkswagen also saw on-year declines in their NEV sales volume in the country. Yet, Tesla’s No.1 competitor, BYD, registered a 13.4% y-o-y increase in its Q1 BEV sales to 300,114 BEVs.

“Production at Gigafactory Shanghai was down sequentially due to seasonality and planned shutdowns around Chinese New Year in Q1,” Tesla said in its earnings report. “Demand typically improves throughout the year. As we enter new markets, such as Chile, many of them will be supplied from Gigafactory Shanghai.”

The factory, with capacity to produce 950,000 cars/year, exported 88,456 Model 3 and Model Y vehicles in Q1, according to data from CPCA. Based on NEV export figures from China Association of Automobile Manufacturers (CAAM), Tesla China’s exports accounted for around 29% of the total Chinese NEV export in Q1. That puts Tesla in seventh place in the ranking of NEV exports in China, which includes both commercial and passenger vehicles.

Price cuts, consumer concerns

The International Energy Agency (IEA) estimates that in 2023, 60% of all electric vehicles sold in China were cheaper than their equivalent combustion engine model. Price is indeed important in the Chinese market, but it is not the only thing that matters to buyers nowadays.

Tesla’s strategy to grow volume over margins is also being questioned by customers, as Tesla cars lose value faster with new price cuts. The company changed its price in China twice this month.

On 1 April, it announced increases for all Model Y products by CNY 5,000 ($690)/car. On 20 April 2024, it unveiled price reductions following a global price cut approach. Then, it cut the prices for of all its line-up (Model 3, Model Y, Model S, Model X) in the Chinese market by CNY 14,000/car. This is Tesla’s second price cut this year, with the Model 3’s refreshed version having a cumulative price cut of nearly CNY 30,000.

In addition to concerns over value retention, customers are now also complaining that the rules for some incentives keep changing.

“The interest-free loan for Model 3 has not been retained after this price adjustment. We buyers can only choose one option between the new price and the interest-free loan,” a customer told Kallanish. “Model Y, on the other hand, now has multiple benefits such as interest-free loans, new prices, and a popular grey colour. However, the multiple benefits of Model Y are also limited in quantity… If this special grey-coloured model is sold out, the loan interest rate of Model Y will be restored.”

On 24 April, Tesla announced new promotional moves with a zero-deposit programme and a new high-performance version of Model 3, for which deliveries will start in Q3. Company’s ceo Elon Musk also said the company will accelerate the development of new, more affordable models to early 2025, instead of the second half of that year.

Chinese customers have long called for new variations. The Model 3 and Model Y, the two most popular models in China, have been on the market for eight and five years, respectively. Last year, Tesla launched a refreshed version of Model 3, but many claim there are barely any changes.

No longer the coolest EV

The perceived lack of technological advances and changes is destroying Tesla’s brand image in China, according to Shaun Rein, managing director of China Market Research Group. He believes “the Teslas and Apples of the world are in a lot of trouble right now,” because Chinese smart consumer electronics manufacturers are just “better and cheaper.”

“By the China side, when Tesla came in, they were a luxury brand. I mean in my housing compound, people five years ago used to buy Bentley, Porsche, BMW or Mercedes, then four years ago they all started buying Teslas because they thought it was the coolest thing,” he explains. “Now, in the last year, I haven’t seen anyone buy a new Tesla. Everybody’s buying a Li Auto or they’re buying a Nio. So the problem is Tesla’s brand image in China is gone. There’s no reason to buy a Tesla from a quality standpoint. The Chinese NEV makers are as good if not even better, and they are even cheaper.”

“A Western brand cannot compete on price in China. The Chinese manufacturers will come in even cheaper. They will still have good quality, and they’ll take even thinner margins. So Tesla’s in a lot of trouble,” he continues.

Tesla is gradually losing market dominance, especially in the mid-level segment of CNY 250,000-300,000/vehicle. While some carmakers are still applying discounts and cuts to boost their sales and market share, others are standing their ground and brand image.

“Based on the full prediction of the market, the brand set a very competitive price when the model was released, so it will not follow Tesla’s promotion strategy,” Jinwen Lin, vice president at intelligent BEV brand Zeekr has recently said.

Musk and the Tesla team are confident that the upcoming robotaxi and autonomous driving technology will give the company the edge it needs to remain competitive with Chinese peers. The robotaxi, to be known as Cybercab, will be unveiled in August.

Meanwhile, the ceo said Tesla’s autonomous driving technology, known as full self-driving (FSD), has been upgraded to the 12th version. “If you haven’t experienced this, I strongly urge you to try it out. It’s profound and the rate of improvement is rapid,” he told investors last week. The plan is to eventually push this globally subject to regulatory approval, and that move certainly includes China. Tesla notes the technology will have to be mildly tweaked to reflect road rules of each country.

On 28 April, CAAM announced Tesla’s Model 3 and Model Y vehicles produced in China have passed vehicle data inspection tests. The data security compliance mainly inspects four aspects: anonymisation processing of facial information outside the car, not collecting cockpit data by default, in-car processing of cockpit data, and significant notification of processing of personal information.

Tesla is now the only non-Chinese vehicle company certified compliant with local regulations, a major boost to its upcoming robotaxi and other vehicle intelligence services. During its visit to China over the weekend, Musk met with Premier Li Qiang and reportedly inked a mapping licence agreement with Baidu. The move likely clears the final hurdle for Tesla’s FSD to be offered in China.

Some experts think FSD is the highest level of assisted driving systems. If and when it enters the Chinese market, it will be a huge improvement to the user experience of Tesla models and Tesla’s brand image. But as Chinese firms are on Tesla’s tail, vigorously expanding their autonomous driving capability, it seems the smart EV market war is only just starting.