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Tesla's honeymoon in China strained by chip downgrade row

Angry owners refuse free upgrade as they hold out for higher compensation

Tesla has pinned high hopes on China, both as a production center and a market.    © Reuters

HONG KONG -- When Chinese authorities took Tesla to task for quietly downgrading a key chip in some of its Shanghai-made vehicles, angry owners cheered.

Earlier this week, Tesla was found to have substituted a previous generation of the control chip, which is responsible for autonomous driving functions, in newly delivered cars despite its spec sheet and marketing materials indicating the latest version would be used. In response, the Ministry of Industry and Information Technology on Tuesday summoned Tesla executives and instructed the company to clean up its act.

"It's definitely a good news for us," said Yummy Lou, a new Model 3 owner in the eastern Chinese city Hangzhou, of the ministry's move.

Lou, a 25-year-old pastry maker, said she filed a complaint against Tesla more than a week ago after discovering her car was among those affected, but had not heard anything since. She said she had been concerned that the government would shrug off consumers' complaints, as Tesla has "very good relations" with officials in China.

"Tesla has been too spoiled," she said.

Unfortunately for Tesla, the government appears sympathetic to Lou and others like her.

"The ministry has ordered Tesla to immediately rectify the problem according to related regulations," the ministry, which is under the State Council, said in a statement on its official website on Tuesday. It also urged the Tesla to fulfill its corporate responsibility, and to ensure the consistency of the product, quality and safety.

Tesla insists that using the older chip does not impair performance and has promised free upgrades for affected buyers. That is not enough for some owners, however, who are filing complaints with the China Consumers' Association and local commerce and business regulators, and even preparing to file a class-action lawsuit against the company.

Foreign companies are leery of falling foul of public and government sentiment in China, a country known for zealously defending "consumer rights." Every year in mid-March, state-run China Central Television airs a widely watched consumer rights show infamous for naming and shaming companies for allegedly cheating or misleading consumers. Apple and Volkswagen are among those who have been targeted in the past. Appearance on the show often lead to repercussions such as boycotts or a drop in sales.

The backlash is a nasty shock for Tesla, which has enjoyed popularity with the Chinese public and hefty support from the government.

Tesla's newly built Gigafactory in Shanghai has been a major showcase of China's commitment to further opening up its vast car market. It is the country's first fully-foreign owned car plant, and Tesla has enjoyed full policy support from the government. It only took 10 months for Tesla to build the $2 billion factory, and the local government has provided favorable leasing terms, tax waivers and subsidies.

Tesla also has high hopes for sales in China, the world's largest car market.

The company plans to add more capacity of some car parts at its China plant in localizing the production, according to a Reuters report, citing document from Shanghai government. Right now, Tesla imports most of the car parts for the Shanghai-made Model 3 vehicles.

Tesla's billionaire founder Elon Musk also has enjoyed much personal fanfare in China, being hailed as pioneer of a new round of technological innovation. But with the chip downgrade news gaining momentum on social media, the halo around Musk and his company could start to dim.

The topic "Chinese owners prepare to launch class action against Tesla" had been searched more than 500,000 times as of Wednesday noon. Many self-proclaimed owners slammed Tesla's response as arrogant, with some demanding compensations to the tune of three times what they paid for their Model 3s. That is in line with the amount of compensation stipulated under China's Consumer Protection Law. 

Musk Xu in the eastern Chinese province of Jiangsu, is a member of a Tesla consumer rights group that is now preparing a class-action suit against the company. The 37-year-old said a Tesla sales manager called him to schedule an appointment to upgrade his control chip to the newest version as soon as possible, but Xu refused.

"Tesla needs to pay for what they have done," he said. The group is demanding compensation equal to triple the price of the cars.

Xu also questioned Tesla's explanation of the snafu. "Tesla said the downgrade was due to supply chain disruptions caused by the coronavirus outbreak, but now they told us they have the new chips."

Shawn Shen, who first exposed Tesla's product inconsistency on social media, was also offered a fast upgrade. He told Nikkei that a Tesla representative have arranged an appointment to upgrade his hardware this Saturday.

Lou from Hangzhou, however, was told that she can only get an upgrade in the second quarter.

"Is that because I am more aggressive in defending my rights?" Xu asked.

Tesla did not respond to Nikkei's request for comment.

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