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Electric cars in China

Tesla and Musk risk wearing out China welcome over quality fears

Five ministries warn bestselling US EV maker over consumer rights

Tesla last month started to sell locally made versions of its Model Y sport utility vehicle in China.    © AP

HONG KONG -- Few foreign automobile companies have enjoyed the kind of policy support Tesla has had in China -- but Beijing's latest action towards Elon Musk's company is a shot across the bows not to take its lofty position in the world's largest car market for granted.

Tesla's executives in Shanghai and Beijing have been summoned to meet with China's market regulator and four other central government departments over customer complaints including unusual acceleration, battery fires and problems with updating the cars' software, according to a statement published by the State Administration for Market Regulation on its website on Monday evening.

The regulator urged Tesla to "strictly comply with the laws, fulfill its responsibility to ensure product quality and safety, and protect consumer rights."

"I think it's a speed warning and a sign that technology companies need to not get too far out in front of the pack. ... China is sending a message that they don't have special privilege when it comes to quality issues," said Bill Russo, founder and CEO of advisory company Automobility, in Shanghai.

The warning amounts to a reality check for a company that so far has had China at its feet. Tesla has benefited from generous subsidies, tax concessions, low interest loans, cheap land on which to build a factory and a responsive government -- and the results have been dramatic.

Its Shanghai-made Model 3 quickly became China's best-selling electric vehicle model shortly after its launch in early 2020, surpassing models produced by domestic players Xpeng, Nio and Li Auto and BYD.

China is one of Tesla's fast-growing markets, with sales doubling last year despite the coronavirus pandemic. Its sales in China reached $6.66 billion last year, accounting for 21% of global sales, according to Tesla's annual report.

Besides the popular Model 3, Tesla started to sell the locally made sports utility vehicle Model Y last month and is expanding its production facilities in Shanghai. Tesla's success in China has helped boost its market value, with its Nasdaq-listed shares surging in the past year.

"We are currently the leader in the Chinese EV market. So I think we're mostly doing something right," Musk said in an earnings call on Jan. 27.

Now the regulatory action is casting a cloud.

While the mentioned malfunctions are not unique to Tesla, other EV brands have not been called into meetings with multiple top government agencies for talks. In China, such meetings initiated by the regulators often work as a warning to the company. Analysts believe the joint government action shows that Beijing is stepping up scrutiny of Tesla to hold it accountable for quality issues as the U.S. company ramps up production in China.

Tesla has been criticized by multiple state-owned media outlets including the Xinhua News and Global Times for its mishandling of a series of quality issues recently.

In a high-profile case last month, Tesla blamed the "strong current" of China's national grid for a charging failure case reported by a Tesla owner in the eastern city of Nanchang. Tesla later apologized to State Grid after the state-owned electricity utility publicly rebuked the U.S. company, saying its current was "stable and normal" and advising Tesla to hire professional personnel to investigate the cause.

Tesla has also been hit by several rounds of recalls in China over the past year. In October, when Tesla was required by the Chinese regulators to recall 29,193 imported Model S and Model X produced between 2013 and 2017 over safety concerns, Tesla denied the problem was caused by quality flaws. It blamed "driver abuse", according to a CNBC report. In March, Tesla model 3 owners discovered that the company had quietly downgraded the computer chip inside their vehicles to an older generation without informing them.

In an editorial published by Xinhua News on Tuesday after the "meeting" with the market regulator and other government departments, Tesla has been urged to respect Chinese consumers. "Tesla can't just [gloss over] the questions of Chinese consumers. It should come up with solutions instead of just paying lip service," it said.

Compared with its rather defiant attitude towards regulators and media in the U.S., Tesla seems to be adopting a more cooperative approach responding to Chinese regulators' criticisms.

"Tesla sincerely accepts the guidance of the government and will conduct a deep reflection on the company's shortcomings in operations," Tesla said in a statement shortly after the news on Monday. "We will strictly abide by the laws and regulators in China and always respect consumer rights," it said.

In China, executives of private companies are often called into meetings with regulators for operational issues that the authorities find problematic. The regulators also give guidance to companies through such meetings.

Regulators recently summoned executives of some of its own home-grown tech champions, including Alibaba Group Holding and Tencent Holdings, as Beijing is moving to curb the power of big internet companies.

Analysts told Nikkei Asia that the action against Tesla seemed to be mainly motivated by the company's mishandling of consumer complaints and the need to address wider quality issues of electric vehicles, rather than a more serious step to weaken Tesla's advantage in China.

Tesla clearly sees the importance of keeping good ties with Chinese government and the public. It started hiring public and government relations staff in China in October, Bloomberg reported.

Cui Dongshu, secretary-general of the China Passenger Car Association, believes Tesla could face more scrutiny from the Chinese regulators.

"The regulators are clearly upset about the way Tesla has ignored consumer's complaints about quality issues," he said. Tesla is among the fastest growing EV companies in China, and regulators feel they need to intervene to ensure similar problems can be handled better in the future, as "Tesla's got an attitude problem".

But others said the warning did not mean that Tesla was falling out of favor with the Chinese government.

"China still wants to expand its international cooperation.Tesla is definitely the standard for EV and autonomous driving," said Toliver Ma, an automobile analyst at Guotai Junan Securities. "I think they just want to make sure Tesla keeps up their quality, as they have been getting many resources from the government."

Le Tu, managing director of Beijing-based Sino Auto Insights, believes authorities are using Tesla to send a message to all EV and battery makers.

As there would be many more EVs on the roads later this year from all automakers, Le said, the government would want to avoid any major issue that could hamper the public's perception on such vehicles.

"They are using this warning to Tesla to communicate writ large to all the players, EV makers, battery manufacturers, etc, that they're all paying attention and will not tolerate failures that put citizens in danger," he said.

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