China, Meet Tesla

After a Cinderella year in the U.S., Tesla (NASDAQ: TSLA  ) is ramping up its global expansion. While most of the company's international expansion has been focused on Europe, there's one important market in Asia that Tesla is about to take on: China.

The potential in China
Going into China, the company faces a lot of uncertainty. CEO Elon Musk expressed his dubious outlook toward making projections in the country in Tesla's first-quarter letter to shareholders: "I think we'll see probably at least 5,000 [units of demand per year] in Asia, but I mean, that could be a much bigger number and China is kind of the wildcard here."

Describing the market as a "wildcard" makes sense. Though Tesla is new to the market and prices of the Model S are significantly higher in the country, China is the world's biggest market for premium sedans. So while there's a lot of potential for the Model S in China, it's also very tough to judge what kind of sales to expect this early in the game.

Notably, it appears that Tesla may have developed an increasingly bullish outlook for the China market throughout the year. In the company's second-quarter letter to shareholders Musk seemed to raise his guidance for Asia, saying that he believed that "China and the rest of Asia and other countries" (not including countries in Europe and North America) could have half the annualized demand of current North American deliveries at about 20,000.

In Q3, Musk remarked that the soft opening of Tesla's Beijing store indicated that demand likely wouldn't fall short of their expectations.

We are not really even trying [in Tesla's soft opening in China]. [...] We not doing anything. It is word of mouth maybe just not really anything beyond that. So, yes. It seems like things are going to probably go pretty well there, I think.

One thing is for sure: The demand will exceed supply for some time. This became clear when in the company's third-quarter letter to shareholders Musk said that the wait time for orders in the country appears to be accelerating. 

Prepping for China
To put a more objective figure on this "wildcard" demand, Tesla has launched a website to take preorders for the vehicle. Though the website is new, Tesla was already taking reservations in the country.

Screenshot of Tesla's China website.

Thanks to the costs and taxes of bringing a U.S.-built vehicle to China, the company will be charging a hefty price there. Just to make a reservation for the Model S in China, customers will have to put about $40,000 on the table. The purchase price comes in at a minimum of about $146,000 -- all the way up to $200,000.

When will Tesla begin delivering vehicles in China? The company anticipates it will be in the first quarter, though it may be as late as March.

Prepping the vehicle to sell in China required modifications. Particularly, it spiced up its back seat. Unlike in the U.S., it's common for owners to sit in the back seat while someone else drives. To meet expectations, Tesla gave it an "executive" back seat.

Demand likely to exceed supply
With the company only estimating to reach a rate of vehicle deliveries that exceeds 40,000 vehicles per year by the end of 2014, chances are that Tesla will likely still be supply limited as it ramps up its global expansion. So investors shouldn't get their hopes up for more than 5,000 deliveries in China in 2014. That said, the company's seemingly on-time rollout in China is a good sign that Tesla hasn't encountered any supply barriers that have caused Tesla to put plans on hold in China. Irrefutably a growth stock, a slowdown in the company's expansion wouldn't go over well with investors.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 17, 2013, at 11:27 AM, TheOstrich wrote:

    Regardless of TSLA's stock price, it's hype, it's so called safety and all the other superlatives showered on this car, it's long term viability as a company and as transportation is still a "wildcard".

  • Report this Comment On December 17, 2013, at 12:25 PM, Decoy0527 wrote:

    I've been investing for about 40 years and although I wasn't around when the tulip bulb mania was in process, I have seen more than a few periods of irrational exhuburance (to quote Greenspan). My take on Tesla is that it is impossible to know how many cars it will sell 5 years from now, but it is priced for almost perfection. The other unnerving part of the Tesla story is the near messianic quality Elon Musk has taken on for his devoted followers. I made a few bucks shorting Tesla at $175. I look forward to another entry point, maybe around $175 again. Any way, the Tesla story has been very, very interesting to follow.

  • Report this Comment On December 17, 2013, at 1:50 PM, duuude1 wrote:

    The Chinese won't be making silly statements like:

    "it won't drive in cold weather"

    "they've never built cars before"

    "where's the profits"

    "the big incumbents will crush them"

    "it's made of aluminum"

    "there's no 20 year data on this start-up"

    They'll just buy a great product.

    Heck, even Santa is buying:

    http://buzz.money.cnn.com/2013/12/17/tesla-stock-santa/?sour...

    :)

    Duuude1

  • Report this Comment On December 17, 2013, at 4:28 PM, ffbj wrote:

    You can't drive a tulip bulb nor live in one. No one alive today was around for it btw, when, at its height a single bulb might go for the price of a house.

    Sure Musk is sort of eco saint and as such he has followers but then there was Steve Jobs and I don't think you would say Apple was not worth it just because Jobs had messianic tendencies.

    Good that you made a bit of money shorting it at $175 too bad you did not have the foresight to buy it at $17.

    Fairly valued around $150-175.

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