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Is Tesla Motors overhyped in China?

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Potential buyers check out a Tesla Model S P85 at the carmaker's showroom in Beijing in January.   © Reuters

Wall Street is abuzz with talk of the prospects of Tesla Motors in China. Many analysts seem to think that Elon Musk, the company's founder and CEO, will meet his target of selling more than 5,000 electric vehicles in the country this year.

     China is a massive, fast-growing auto market with a nasty pollution problem, after all. Even the negative press received by Tesla recently -- wealthy Chinese customers are complaining they are not getting their cars delivered fast enough -- paints a rosy picture about its appeal there.

     But there are several good reasons to be cautious about Tesla's China fortunes. For one, the company is still not seeing much traffic to its website. There are also doubts about whether the company can provide buyers there with the necessary charging infrastructure for their vehicles. And finally, the high price of the company's cars makes it unlikely that fleet buyers, which local rival BYD relies on, will be looking to Tesla.

Quiet on the Web

According to Alexa, a Web analytics provider, only around 4% of total visitors to the Tesla website, including its Chinese language site, have been coming from China in recent days. The figure seems especially small considering that China is home to more than 20% of the world's internet users. In comparison, 51% came from the U.S., 5.2% from Canada and 4.2% from India on April 28.  (A Tesla spokesman said that according to the company's internal tracking, Chinese visitors have typically made up closer to 11% of traffic over the past six months.)

     Website visits are not the best proxy for actual orders, of course, but they provide some picture of public interest in the brand. Considering that Tesla's target market is likely to be dominated by educated, high-income consumers, those seriously considering such a big-ticket purchase as a Tesla Model S are likely to visit the website before placing an order.

     Even if there are enough people who want to pay around 750,000 yuan ($120,300) for a Model S -- the sales price of the company's latest sedan excluding any bells and whistles, which can add another $75,000 -- the limited number of electric vehicle charging points around the country is a major stumbling block.

     After receipt of a $2,500 deposit, car orders are sent to California, the location of Tesla's plant. It takes the company about three to four months to first build a car and then ship it to China.

     Tesla requires all buyers to have a dedicated parking space. It will arrange the dispatch of technicians to install an individual charging station at the parking space after receipt of the  deposit. The company says it has completed almost 400 home installations so far.

     Customers are asked to pay another $40,000 to cover customs and import duties before the car is released by customs, which can take approximately 10 days.  The remaining balance is paid when the car is delivered.
     
     Property management companies, fire departments and network limitations constrain Tesla from installing optimal chargers in private parking spaces. The company's home charger can charge the battery at a maximum current of 40 amps. Tesla intends to introduce an 80 amp home charger later this year.

     Tesla is seeking partnerships with China's two major power operators, State Grid Corp. of China and China Southern Power Grid, to jointly construct charging stations. The carmaker also plans to set up a network of  "superchargers" , starting with Beijing and Shanghai. It would rely in part on solar energy, but the smoggy environment of many Chinese cities could limit the useful input of that source.  Even if placed under perfect sunshine, these chargers may draw most of their power from the grid, depending on how many cars are hooked up to the chargers during a daily cycle.

     BYD's electric cars have been used by taxi fleets at home and abroad, and some people wonder whether this is a model Tesla can look into. But when we asked auto dealers and sales managers whether that was likely in China, they all said no.

     A quick cost and benefit analysis demonstrates why.

     A traditional car consumes roughly 9 liters of gasoline per 100km, while an electric vehicle consumes around 26 kilowatt-hours of electricity for the same distance. Taking into account the price difference between gasoline and electricity, driving an electric vehicle would save about $0.08 per kilometer. If a taxi drives 450km per day, the annual savings from using an electric vehicle would therefore be $13,133 -- not a small amount.

     However, taxis are allowed to stay on the road for only six years in China, limiting the total savings over that period to $78,800. Given that an average taxi with an international combustion engine costs about $16,000, compared with $120,000 for a Tesla Model S, the cost of going with the U.S. electric car is still far higher, even when factoring in the savings on fuel.

     Additionally, many taxis in China are powered by natural gas, which costs about $0.75 a liter, more affordable than the $1.20 per liter for gasoline. This further narrows the savings compared with driving a Tesla. And the cost of repairing a Tesla is far more expensive than that for a typical taxi in China.

Danger of high expectations

While Musk is frequently compared to Steve Jobs in terms of entrepreneurship and influence, luxury autos and smartphones are distinctly different consumer products. An iPhone is an affordable luxury for the average Chinese consumer with a monthly income of around $500; a Tesla is within reach only for a wealthy minority.

     Unlike BYD, whose new-energy push has failed to yield big results despite investment by Warren Buffett, Tesla is a strong, high-end brand that appeals to wealthy Chinese. However, China could be a wild card for the company's share price, because the high expectations leave management no room for any execution errors. 

     Our latest survey on the Chinese auto market indicates that growth is slowing at domestic and joint-venture brands, and many dealers are pointing to the macro economy as the culprit. In contrast to all the hype, Tesla may find itself caught in a cooling market in China.

Junheng Li is head of research at JL Warren Capital LLC, a China-focused firm that uses big data technology to research Chinese equities and the economy. Priscilla Zhu and Ana Swanson are analysts at JL Warren.

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