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."

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  • 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....rich 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.

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