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Electric cars in China

Tesla conquers China's EV market with taste of affordable luxury

Chinese-made Model 3 gives automaker 21% market share in first half of year

A Tesla Model 3 on display at the Canadian International Auto Show in Toronto. A new factory in Shanghai has given Chinese consumers access to the vehicle at a lower price point.    © Reuters

GUANGZHOU -- Tesla became the top seller of electric vehicles in China in the first half of the year, as the locally-made Model 3 gives consumers an affordable way to enter what used to be an exclusive club open only to the rich.

Tesla doubled its China sales to about 50,000 vehicles from a year earlier, even as overall sales in the world's largest electric vehicle market roughly halved to about 235,000, according to Chinese research company Ways. This raised Tesla's market share there to 21% from 6%.

The boost largely came from the Model 3 sedan, which Tesla began shipping out of its Shanghai factory in January. The cheapest option of these autos can be purchased for about 270,000 yuan ($39,000) after subsidies, more than 30% less than the same model imported from America.

"It's so much cheaper than an imported Model 3. More younger customers are buying this," a salesperson aggressively pitched to customers at a dealership in Guangzhou on Friday, which was packed despite it being a weekday.

"You look cool when you come to work in a Tesla," said one woman in her 40s who works at an electronics maker. "I could afford it, if I wanted."

Tesla has been working to build up its brand in China since entering the market at the end of 2013. CEO Elon Musk himself handed out the keys to the first batch of Tesla's sold in the country, and the vehicles count Xiaomi founder Lei Jun and actor Tony Leung Chiu-wai among their fans.

The automaker initially focused on luxury options such as the Model X, which at around 800,000 yuan is four to eight times more expensive than the typical electric vehicle sold in China. Secure in its image as a luxury brand, Tesla is now chasing a wider swath of the Chinese market with the locally made Model 3.

In addition to solidifying its image as a luxury brand, Tesla is expanding its charging infrastructure. Tesla had built over 2,000  fast chargers at shopping centers, hotels and other locations across China as of the end of 2019, and is believed to be aiming for at least 6,000 by the end of this year. Because Tesla vehicles can also use other companies' charging stations, "there is absolutely no need to worry about charging your car in big cities like Guangzhou," according to a dealership.

Many buyers also like that used Tesla vehicles tend to retain their value better than other electric vehicles.

Tesla considers China a critical market. "China is very pro-EV and is the biggest EV market in the world," Musk said in a podcast released in January. The country accounted for about a third of California-based Tesla's overall sales in April-June.

Musk also said on an earnings call in July that various efforts are underway at the Shanghai factory. Tesla plans to start shipping the Model Y sport utility vehicle from the plant in 2021.

Despite Tesla's gains in January-June, Chinese electric vehicle makers such as BYD suffered a sharp downturn in the first half of the year. Because their vehicles tend to have a shorter range, they rely less on retail customers and more on car-sharing platforms and other corporate clients. The coronavirus forced many businesses to cut back on new investments, resulting in a more than 70% drop in corporate demand in January-June.

Government subsidies designed to promote electric cars also halved around mid-2019, further sapping demand. Automakers are now offering their own subsidies to popularize electric vehicles in rural villages and other untapped markets. Though unit sales of new-energy vehicles -- EVs, plug-in hybrids and other greener cars -- rose on the year for the first time in 13 months in July, the full-year tally is expected to fall about 10%.

For now, Chinese makers do not have the branding to compete with Tesla. "Tesla will remain at the top of the Chinese market for the next several years," said Tang Jin at Mizuho Bank.

But the local manufacturers are working to change this. BYD launched the Han series in July, which has a longer range at a cheaper price than the cheapest Tesla Model 3. Nio, often called the Tesla of China, is also increasing sales through word of mouth.

Growing tensions between the U.S. and China loom heavy over Tesla. The Chinese government could interfere with supply chains for Tesla's Shanghai factory to retaliate against U.S. pressures, Bernstein Research analyst Toni Sacconaghi said.

"Musk has a lot of fans in China, so a boycott seems unlikely," said Mizuho's Tang. "But there is a possibility Tesla could be affected in some way by U.S.-China tensions."

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