When a supply-limited company charges less than the industry norm, heads turn. That's exactly what Tesla Motors (NASDAQ:TSLA) announced this morning. The standard industry practice, Tesla says, is to double the U.S. price for luxury vehicles sold in China. Tesla, of course, decided there is a better way than the industry norm.
Carving its own path
This isn't the first time Tesla decided to go against the flow. In its most notable story of defiance, the company continues to insist that it will not use the dealership model. Instead, Tesla persists in its Apple-like retail store model, despite numerous legal battles.
In an article for Automotive News, Mark Rechtin sums up Tesla CEO Elon Musk's refusal to use the dealership model:
... Musk says he will not consider such a proposition. Maintaining control of the retail process is key to him. And he says skeptics are overstating the need for a huge dealer network because word-of-mouth plays a larger role for Tesla than for other brands.
Tesla is showing a similar disregard for the industry norm in its bold move regarding pricing in China. The 85 kWh Model S will sell there for 734,000 CNY, or $121,300. That's about 50% more than the U.S. version, which sells for slightly more than $80,000. That's a considerably smaller markup than the ones Tesla's competitors apply in the country.
Acknowledging the pricing move is "something of a risk," Tesla believes that it is "the right thing for Chinese customers."
In a blog post this morning, Tesla explains:
If we were to follow standard industry practice, we could get away with charging twice as much for the Model S in China as we do in the US. But we're doing things differently, even if it means that some people might look at the price and mistakenly think it must somehow mean the Model S has less value than its competitors.
The company has essentially eliminated any opportunity for incremental markups in the country, charging only enough to cover "unavoidable taxes, customs duties and transportation costs."
We care about fairness, and we care about transparency. We care about advancing the cause of electric cars in China. And we care about doing the right thing for our customers – no matter where they live.
But what about supply?
The move is certainly bold. But it's even more audacious when you consider that the company isn't limited by demand. Despite an advertising budget of zero, Tesla sells every vehicle it makes. And this trend doesn't look like it will end soon, with the company's rapid international expansion under way.
So does it make sense for Tesla to sacrifice its markup relative to competitors' when it is entering the country while constrained on supply? It's certainly not a rational move in the short term, but it undoubtedly makes a statement to Chinese consumers that could potentially have lasting effects on its relationship with its customers there. Over the long haul, maybe it makes sense. After all, if Tesla wasn't doing things differently it wouldn't be where it is today.
The move also prompts a new question: Is Tesla, perhaps, about to overcome some major bottlenecks in production? The company beat guidance for vehicle deliveries in the fourth quarter by a higher than expected margin; maybe Tesla expects more rapid acceleration in production in the coming quarters? The aggressive pricing certainly suggests that Tesla thinks it can boost production to handle new orders in a new market.
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Fool contributor Daniel Sparks owns shares of Apple and Tesla Motors. The Motley Fool recommends Apple and Tesla Motors. The Motley Fool owns shares of Apple and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.