Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Elon Musk: Our Peers Are Basically Colluding in China

When it comes to pricing luxury cars in China, the industry norm is basically to double U.S. prices. While some of this markup is to account for unavoidable taxes, transportation costs, and customs duties, much of it goes straight to operating profits. In fact, it's normal for auto manufacturers to double or even triple their profits on their luxury cars sold in China. Is this the right thing to do? Tesla Motors (NASDAQ: TSLA  ) doesn't think so.

Model S.

As The Wall Street Journal reported in December, the BMW X5 xDrive35i had a price tag of $56,025 in the U.S. and, at the same time, $152,176 in China. Mercedes-Benz plays along, too. Its top cars sell in China at a price that about doubles their U.S. price.

China's massive luxury markup
Sure, it makes sense for auto manufacturers to have higher price tags on their vehicles in China -- it's costly to get them there. Tesla, for instance, pays approximately $3,600 on shipping and handling, $19,000 on customs duties and taxes, and $17,700 on VAT for Model S shipments to China. That's $40,300 total, a considerable sum. But, contrary to other manufacturers of premium vehicles, it's by this exact amount that Tesla had decided to mark up its cars in China.

Tesla CEO Elon Musk is leading his company in a different direction: 

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.

After the company unveiled its pricing in China last week, Musk expressed his frustration in a phone interview with Bloomberg. "They're all basically colluding," he said.

Could Tesla's move for fair pricing of its luxury Model S sedan be the beginning of a movement toward fair pricing for its peers in the country? Maybe, but it certainly wouldn't happen overnight. Pressure could come from other outside forces, too. Chinese government officials have criticized foreign auto manufacturers about their pricing practices, even calling it gouging. 

For Tesla, the answer to how it prices its vehicles in China was easy. It approaches pricing the same in every country: Only increase the price by whatever fees are imposed by the country, plus transportation costs.

Does it make business sense?
Though the pricing argument could be debated in terms of fairness, it also could be argued that a fair pricing strategy is better for business, too.

"I just don't think ripping off customers is a good long-term strategy," Musk told Bloomberg. In the Los Angeles Times, Jerry Hirsch also asserted that the move makes business sense. Why? "China is the biggest, and fastest growing, auto market in the world."

A proven investment strategy for investing in growth stocks
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Read/Post Comments (6) | Recommend This Article (3)

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 January 24, 2014, at 6:32 PM, ScottAtlanta wrote:

    I love to hear stories about saving rich people money on luxury items. That's that type of equality that's important....not income equality .....b/c then there'd be no rich people to buy the expensive things.

    Thanks Mr. Musk for keeping rich people rich and letting them enjoy luxury items like all rich people should. Great article. Mr. Musk is clearly a champion of the people.

  • Report this Comment On January 24, 2014, at 7:05 PM, nonqual wrote:

    Musk has also said he wants all service to be "break even." Repairs of minor collision damage to Model S's are extremely expensive. Tesla's costs are problematic. Without regulatory credit sales, Tesla has lost over $10,000 on every Model S delivered through the end of the 3rd quarter.

    In the Milo Minderbender school of product pricing, it can be made up with volume.

  • Report this Comment On January 25, 2014, at 4:44 AM, deeageaux wrote:

    Tesla has not lost money on every sale of the Model S, in fact margins are just about highest in the industry at 21% in 3Q 2013 and approaching 25% now.

    Regulatory credit sales will be almost non existent in 2014 and Tesla will double global sales in 2014, expand stores, service centers and super charger networks worldwide. You could not do this losing $10k per car. Impossible. BTW If Honda and Chrysler don't want to buy ZEV credits from Tesla they should sell more ZEVs.

    Repairs of Model S are not extremely expensive. Shops have learned repairing all aluminum Audi A8 and even average joe repair shops in middle America will have to learn how to repair Aluminum vehicles now that the Ford F-150 is going mostly aluminum save for two steel rails.

    BTW The Chinese have tried income equality. It does not work. It leads to mass poverty. Now that China has over a million millionaires 300 million people have been lifted out of poverty and into the global middle class and 800 million more lifted out of absolute poverty.

    Rich people buying Model S will pay for engineering and manufacturing $35k Model E. Middle class people buying Model E will pay for engineering and manufacturing a $20K Tesla just about 80% of households in the industrialized world with two full time jobs will be able to afford.

    The environment will be better off and national economies than need to import most of their oil will be better of.

  • Report this Comment On January 25, 2014, at 3:31 PM, Jason87467 wrote:

    Elon Musk is a big BSer and I don't believe word he says. He's riding high right now but that won't last forever.....just wait till he get's some real competition. He caught the big boys off track, but not for long.

  • Report this Comment On January 26, 2014, at 5:50 PM, industrldisease wrote:

    And so we would want to vote for the big boys vs. Elon Musk. Dating back to the early 90's ford and chrysler said they would be coming out with a hybrid vehicle that took them another decade plus and they still haven't caught up to toyota. Musk has a vision, enters the first america auto company into the industry in almost 3/4 of a century and is all over the map and globe in 3 of 4 years with an electric vehicle outdistancing competitors. Lets root for your grandfathers automobile ( horse and buggy)

  • Report this Comment On January 27, 2014, at 7:47 PM, ScottAtlanta wrote:

    lol at "chinese have tried income equality."

    "French monarchs have tried income inequality." Their heads ended up in baskets.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2808395, ~/Articles/ArticleHandler.aspx, 9/1/2015 6:23:45 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Daniel Sparks

Daniel is a senior technology specialist at The Motley Fool. To get the inside scoop on his coverage of technology companies, follow him on Twitter.

Today's Market

updated 9 hours ago Sponsored by:
DOW 16,528.03 -114.98 -0.69%
S&P 500 1,972.18 -16.69 -0.84%
NASD 4,776.51 -51.82 -1.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 4:00 PM
TSLA $249.06 Up +0.58 +0.23%
Tesla Motors CAPS Rating: **