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China Is More Serious Than We Thought

China's development is coming at a steep price, as the air in some Chinese cities is so pollution-fouled that it looks like the inside of a chimney. While we here in the U.S. are fond of monikers that equate minor inconvenience with the end of the world, there's no hyperbole in China's Airpocalypse. The public health consequences of all that filth in the air are staggering: Research attributes more than 1 million premature deaths annually to China's industrial haze.

Source: Bobak, Wikimedia Commons.

A big problem warrants a big solution
While Chinese authorities initially went to great pains to deny this problem, there seems to have been a change of heart recently at the highest echelons. This year, the government began requiring 15,000 factories to publicly report air emissions and water discharges in real time, and forced some factories to close temporarily in the areas of greatest air stress.

Last November, in what Scientific American declared the biggest environmental news story of 2013, the city of Beijing made sweeping changes to car ownership rules. Beijing cut new car registration caps by 37.5%, limited total cars permitted in the city to 6 million (Beijing is already at 5.4 million), and established a requirement that 40% of new vehicles be "new-energy vehicles," which includes hybrids and electric vehicles.

Nationwide, China has set a target to have 5 million new-energy vehicles on the road by 2020. The country is already lagging behind this target, so just this week, the government announced that it will sustain a subsidy program for these vehicles at a higher level than had been previously announced. Shares of Chinese electric carmaker BYD (NASDAQOTH: BYDDY  ) rose immediately following the announcement.

Of course, these initiatives will do precious little to curb the smog so long as China's electricity generation is 70% coal-based, but the government is getting aggressive there, too.

Colossal opportunity
All of this adds up to a massive opportunity for electric vehicles, or EVs. Tesla Motors (NASDAQ: TSLA  ) has taken notice. Just this month, Tesla launched its Model S in China. The company set the Chinese price very close to what it charges in the U.S., which could prove to have been a very wise move. There's a trend among luxury automakers to jack up their prices in developing markets. Tesla's choice not to do that in China earned the company high praise from Chinese observers, which can only be good for its brand.

Tesla has already opened a flagship store in Beijing, and it aims to have 10 more locations in China by year's end. The company hopes the Chinese market will generate a 35% increase in its 2014 sales.

The vagaries of the Chinese EV market are in Tesla's favor. So far, there has been precious little consumer interest, and EVs accounted for just 0.1% of total Chinese auto sales in 2013. There are a variety of reasons for this.

1. Chinese consumers are wary of domestic manufacturers when it comes to new technologies, preferring foreign brands. Put a point in the Tesla column.

2. China's EV charging station infrastructure is sorely underdeveloped, creating an opportunity for Tesla to be a part of that development.

3. Tesla really has no competition in the high-end EV market, since domestic manufacturers like BYD are going for the mid-tier segment. Because of this, it also doesn't really matter that Tesla, as a foreign company, isn't eligible for the government subsidies I mentioned earlier. Such subsidies have little effect at the high end of a market.

4. The Chinese government has created a serious demand driver for EVs in the form of a lottery system for license plates. The lottery is aimed at limiting the number of gas-guzzlers on the road. Right now, the chances that any single car buyer will win the license-plate lottery is a minuscule 0.9%. But if they're applying for the separate, new-energy vehicle lottery, that chance stands currently at 100%. Practically speaking, then, if a Chinese consumer wants a car and doesn't want to wait an eternity, that person kind of has to buy an EV or a hybrid.

Take all that together, and Tesla's prospects in China look phenomenally good, at least right now. The company will have a harder time if it decides to chase the lower end of the market with a cheaper model, but that's not on the horizon right now. For the time being, the Chinese market is Tesla's to lose.

In the meantime ...
The Chinese auto market won't electrify overnight, and conventional players still have tons of opportunity. U.S. automakers boomed after World War II, but the coming boom in the Chinese auto market will put that surge to shame! As Chinese consumers grow richer, savvy investors can take advantage of this once-in-a-lifetime opportunity with the help from this brand-new Motley Fool report that identifies two automakers to buy for a surging Chinese market. It's completely free -- just click here to gain access.

Read/Post Comments (13) | Recommend This Article (7)

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 February 16, 2014, at 3:29 PM, Jim85035 wrote:

    So China sells 10,000 Tesla's , they still use coal fired generators to recharge them. 6 of one , half a dozen of the other, it still equals 6

  • Report this Comment On February 16, 2014, at 3:34 PM, Jason87467 wrote:

    Once Tesla saturates their cars to the rich people in the USA, I suppose the next logical target will be China. My question is: what will Tesla do after he run out of rich people? Tesla only make EV's, and the competition is getting ready compete head to head and will eat Tesla alive! Believe me, they will do it. Big auto companies are not green like the Tesla company which has lots to learn about building cars. I know lots of people will say differently and I find that funny. Elon Musk has an ego the size of Mt Everest and he's convinced many people thinking he's infallible. His luck will run out before too long and those who bought shares at a price of 200, will be jumping out of windows.

  • Report this Comment On February 16, 2014, at 4:45 PM, so75 wrote:

    Jim: Many of the Tesla super chargers are solar powered. Power plants are much more efficient at generating electricity than every car having it's own 'power plant'. So, EV's are better.

    Jason: If you could do just a 'slight' amount of research, you will see that Tesla plans on building a 30k car for the middle class consumer. New technologies ALWAYS start with the rich. Were you the very first owner of a brand new flat screen TV when they first came out? Unlikely. But now you can get a flat screen TV for cheap. Stop being so short sighted....please.

  • Report this Comment On February 16, 2014, at 6:05 PM, EdwardInFlorida wrote:

    @so75. Everything you say is true but it's a waste of time trying to convince Jim and Jason. They troll every Tesla article they find. The sad thing is their negativity goes beyond mere ignorance. It is hatred and envy towards successful people, are against progress, and have extremely low self esteem. They are and will be continued to be proven wrong.

  • Report this Comment On February 16, 2014, at 9:06 PM, rigger wrote:

    @ edwardinflorida : You are 100 % correct in your statement on Jim & Jason .

    One thing you left out is they are Both likely SHORT on the stock ( in tesla ) which means every time the stock goes UP their life savings goes DOWN .

  • Report this Comment On February 16, 2014, at 11:21 PM, GeneralZod wrote:

    or they can stop trolling so75. Most likely southern republicans defending big oil. A market that they can't even get shares from.

  • Report this Comment On February 16, 2014, at 11:24 PM, wisleb wrote:

    Why isn't it possible that with all the super sized projects there are around the world that China doesn't engineer massive air handlers to scrub the air? Several large air handlers with high efficiency filtration or even liquid scrubbers like they use on smoke stacks? It has to be possible to figure the amount of mcfm required to achieve this task........B. Wisler

  • Report this Comment On February 17, 2014, at 1:59 AM, Kb2005 wrote:

    KNDI stock is no brainier. Geely is #1 auto mfr in China and currently in 50:50 JV to mfr EV with Kandi technologies.

  • Report this Comment On February 17, 2014, at 4:54 AM, JobbeLoppe wrote:

    Tesla is great - but there's some serious competition. Recently a Chinese company - acquired VOLVO, and they are putting Electric Cars + hubrids out in China and Elsewhere. VW is building a big Electric-car facility in China - And there's probably much more on there, locally. Most of their scooters are electric. It's on the rise -.But they need to have their power-plants off the carbon - or the air will remain horrible no matter how many electric cars ! Probably nuclear power-plants will become the energy-backbone in China for a period.Peace

  • Report this Comment On February 17, 2014, at 5:37 AM, bmmohio wrote:

    I don't care what people say, this is a positive move forward and a clear sign that china cares about their people and environment. This is a huge and positive for Europe and US since both are huge patent owners of environmental equipment. When China balances its trade with both economies it will benefit all 3 economies

  • Report this Comment On February 17, 2014, at 10:36 AM, jeffhre wrote:

    Interestingly enough China's government has finally made a big push to create a domestic market for solar panels. In 2013, for the first time, China's domestic market began to absorb panels that previously were destined only for export.

    In California, Tesla's largest market, CARB studies revealed over 35% of Tesla owners have deployed solar panels. This may not do anything for Tesla stock, but it can affect how EV sales will impact China's air quality.

  • Report this Comment On February 17, 2014, at 10:38 AM, jeffhre wrote:

    Jason87467, My question is, what will BMW do when they run out of rich people?

  • Report this Comment On February 17, 2014, at 11:34 AM, Tgar13 wrote:

    KNDI is the best way to invest in the electric

    Car subsidies made by China

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Sara Murphy

Sara has been writing about and analyzing companies from a sustainable investment perspective for the last 15 years. An ardent optimist, she believes that it is entirely possible for all stakeholders to benefit and profit from companies' ingenuity and innovation.

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