Charging for entry

Tesla Motors on the verge of China move; how will BYD react?

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30 Aug 2013
Week in China

When Elon Musk was asked in an interview with Bloomberg TV in 2011 what he thought of his Chinese competitor BYD, he laughed. When pressed further, the billionaire investor could barely hide his disdain. “Have you seen their car?” he asked.

There are reasons why Musk might be feeling smug. His company Tesla has posted its second consecutive profitable quarter, helped by record deliveries of its Model S plug-in sedan. Tesla shares, lately reaching $167, have nearly quadrupled over the last year. At $20 billion this week, Tesla’s market capitalisation is now about 40% of GM’s.

BYD, on the other hand, continues to struggle. The company, backed by Warren Buffett, saw its own shares plunge 11.8% on Monday [26 August] after it forecast lower profits in the next quarter. Its market value is hovering around $11 billion, much of that derived from sales of traditional vehicles, rather than new energy ones.

Still, this hasn’t stopped Wang Chuanfu, founder and chief executive of BYD, from being equally dismissive of his US rival.

“BYD could make a Tesla any minute if consumer demand for electric cars really ramps up,” Wang announced during the company’s annual meeting in June.

The larger question is whether Musk and Tesla will succeed where Wang and BYD have so far failed: in convincing enough Chinese car buyers to switch to an electric car?

In fact, the two are now set for a showdown after Tesla revealed ambitions to grow in China too. In January, it told reporters at the Detroit Auto Show that it would open its first Chinese showroom in the spring, although the timing has since been pushed back to the end of the year. The sales office is likely to be located in Beijing’s upscale Parkview Green Mall and will be three times larger than any Tesla store in the US, says China Car Times.

The Californian automaker also started taking sales reservations in China last week, with deposits for its zero emission Model S sedan setting Chinese buyers back Rmb250,000 ($40,832). To attract buyers, Tesla plans to make the rear seat of the Model S more luxurious as many wealthy Chinese have drivers, Musk told reporters. The Model S was designed “to be the perfect driver’s car,” he advised. “But obviously, if people are being driven around, then we need to make sure the back seat is optimised.”

In an exclusive interview with China Entrepreneur, Musk played up his star power by offering a personal tour of the Tesla
factory in California.

He also made sure to offer a few soundbites that will please the Chinese regulators – not least offering soothing words on its solar sector, an area where the US and EU have alleged Chinese firms have dumped their panels to gain share. “China is the world leader in solar energy production and that’s great. Sometimes the US government thinks this is a bad thing, and gives the Chinese solar panel manufacturers a hard time. But I think as long as China can produce high quality and low price solar panels, that is good. The world should also not think of this as a bad thing,” Musk suggested.

But before Tesla can start selling to the country, Musk is going to have to deal with another sticky issue. The China Daily has reported that the “Tesla Motors” trademark is already owned by Guangdong businessman Zhan Baosheng, which effectively blocks the US firm from introducing its brand to the Chinese market. Conveniently, Zhan claims to be researching electric car production himself, although he says he’s prepared to sell the “Tesla Motors” name back to Musk for $32 million.

The two are now set for a showdown after Tesla revealed ambitions to grow in China too

Readers of WiC will remember that Apple faced a similar situation with the launch of its iPad in China. It ended up paying $60 million to Shenzhen’s Proview Technology, which owned the right to the iPad trademark. (Likewise Land Rover has also faced trademark issues, see WiC100).

But the larger question is whether Musk and Tesla will succeed where Wang and BYD have so far failed: in convincing enough Chinese car buyers to switch to an electric car? As WiC reported in issue 159, electric cars have been slow sellers in China. Most buyers are put off by the higher price of the cars, as well as concerns about the convenience and cost of recharging their batteries.

The authorities in Beijing tried to jump-start demand by offering subsidies of as much as Rmb60,000 towards the purchase of electric vehicles (some cities have added extra incentives too). But the central subsidy programme ended last year and there has been little signal that it will be renewed. That helps to explain why BYD has been focusing on the bus and taxi market for its electric vehicles, where purchases are often made by local governments rather than individuals. Even Wang admits: “For BYD, the technology for electric vehicles is not the problem, the market is the problem.”

Still, perhaps BYD can learn a few things from its US rival. One reason for some of the hype surrounding Tesla is that Musk, who has been compared to Steve Jobs as a master showman, understands that aesthetics and branding are as important to buyers as the technology itself. Tesla has worked hard to design cars that drivers actually like the look of.

The sales experience is important too. Unlike many car dealerships, Tesla showrooms are often in upscale neighbourhoods. Customers are surrounded by jumbo touchscreens that allow them to configure and then preview their future purchases digitally.

“The biggest difference between Tesla and BYD, is that the former is selling a brand while the latter is selling technology,” says 21CN Business Herald.

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