Musk & # 39; Moment of Truth comes from China when the Tesla is introduced

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(Bloomberg) – Elon Musk's decision to assemble Tesla Inc. cars in China took years of planning and billions of dollars. Now comes the challenging part.

The Model 3 electric sedans that roll off the Tesla Shanghai plant – the first outside the United States – are facing a market where total vehicle sales are expected to decrease for a third year in a row. After about 5% of car sales were made in China, electric vehicles lost momentum due to the economic slowdown and the government cut subsidies for buyers.

This could lead to problems with a market launch where investors look closely to see if Tesla has what it takes to be global. A slow start to selling its China-made cars would put more pressure on the finances of the unprofitable manufacturers, leaving Musk little room for maneuver to prop up a stock hovering at an all-time high.

"Tesla is in a hurry to start shipping before other global brands launch more electric vehicles," said Zhang Yan, an analyst with research firm LMC Automotive in Shanghai. "It is an attempt to conquer the market."

Electric vehicle sales in China decreased 42% in November. That said, Musk and his team are looking at a market that is very different from mid-2018 when the decision to build a plant in Shanghai was announced. At that time, sales in the industry rose by around 100%.

The difficult market, according to LMC Automotive, could result in Tesla selling only 21,000 Model 3s made in China this year. That would be a slow start, since more than 1,000 cars are already being built in Shanghai each week and production is to be doubled next year.

According to LMC Automotive, the forecast takes into account Tesla's past production delays, potential supply chain restrictions, and the complexity of producing high-quality cars on a large scale.

Others are more optimistic. According to Yale Zhang, managing director of the Shanghai-based consulting firm AutoForesight, Tesla could sell around 100,000 models 3. Wang Lei, a Shanghai-based analyst at China International Capital Corp., said Tesla could sell 120,000 Model 3 and Y combined vehicles.

Given Tesla's volatile stock price, investors will focus on the Shanghai ramp-up. Success in increasing sales in China could push Tesla up to $ 500 a share, said Adam Jonas, a Morgan Stanley analyst, in a December announcement to customers. Tesla climbed to a record $ 443.01 on Friday after rising 26% last year.

So far, the China project has been going smoothly. Thanks to Musk's visits, the company received preferred bank loans and quick approvals for construction and manufacturing. And as subsidies expire, the on-site Model 3 still qualified for a substantial handout of up to $ 3,550 per car.

However, success presupposes that the consumer is convinced. Much of the electric vehicle purchases in China – about 70% according to Sanford C. Bernstein – have so far been made by the government and by "direct customers", including taxis, mobility services and other government fleet operators. Such buyers typically do without premium cars like Tesla in favor of cheaper local models.

"It's a distorted need," said Robin Zhu, an analyst at Bernstein. "And the market won't change significantly in the next two to three years."

Cars that cost less than 100,000 yuan (US $ 14,300) account for more than half of EV sales in China, according to Bernstein. Tesla lowered the starting price of Model 3 from 355,800 yuan to 323,800 yuan last week – a 9% reduction. Subsidies cut the starting price to 299,050 yuan.

"To paraphrase Elon Musk, the demand may be insanely high, but people literally cannot afford to buy it," said Zhu.

Of course there is a part of the Chinese population that Teslas can afford. However, the Palo Alto, California-based company will not be the only global EV brand to target these buyers.

The Volkswagen AG Audi plans to sell nine new energy vehicle models in China over the next two years, more than half of which are purely battery-electric. The first electric model, the E-Tron, debuted in November at a starting price of around 693,000 yuan.

The Mercedes-Benz EQC electric model from Daimler AG will be available from October at 580,000 yuan. BMW AG plans to build the iX3 crossover in China next year and is working with a Chinese partner to electrify its mini model.

There are also a lot of local upstarts targeting the premium segment. Electric SUVs from NIO Inc. and Guangzhou Xiaopeng Motors Technology Co. or Xpeng Motors are aggressively priced and have already found fans.

"It will be a challenge for automakers to differentiate themselves and be competitive," said Stephen Dyer, managing director of Alixpartners, a global consulting firm.

Tesla, a pioneer in electric cars, is likely to have a head start in the next one to two years before competition catches up, said David Whiston, analyst at Morningstar Inc. in Chicago. Tesla vehicles have an industry-leading driving range that matches brand appeal.

Registrations of Tesla vehicles in China rose 14-fold in November to 5,597. Although growth is expected to be from a low level, the number indicates good demand for his vehicles, even though all the models available so far were more expensive import versions of the Model 3 and the high-end sedan Model S and the Model X SUV ,

Tesla also doesn't have to worry about selling traditional internal combustion vehicles. Global competitors operate expensive gas-guzzling plants in China and have to ensure that their new electric vehicles do not cannibalize more profitable gas-powered plants.

“Other multinational companies that have inherited traditional automakers have been reluctant to enter the market lately. They jump into the pool they never wanted to swim in, ”said Bill Russo, CEO of the consulting firm Automobility Ltd. in Shanghai. “Tesla is not a conflict company. You don't have to choose.

Contact Bloomberg News staff for this story: Chunying Zhang in Shanghai at czhang714@bloomberg.net

Contact the editors responsible for this story: Young-Sam Cho at ycho2@bloomberg.net, Ville Heiskanen, Michael Tighe

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