Tesla Motors Inc.: Does China Dream of Electric Wheels?

Does China dream of electric wheels? Tesla Motors (NASDAQ: TSLA  ) must soon face the answer to that question. The company's success -- and its stock price -- hinges on sales growth in China. This Fool proposes that Tesla could win big because its value proposition invokes modern China's dream.

Chinese Dream, electrified
The Chinese Dream promises a better life for China's population of 1.35 billion. Promoted by Chinese President Xi Jinping, the Chinese Dream parallels the American Dream of the 1950s in many respects: It entails material prosperity and a better life for one's children.

Yet given China's 21st century challenges, the Chinese Dream includes sustainability. The New York Times and The Guardian have popularized the "China Dream" concept, which requires fixing China's vast environmental woes. And China's citizens are demanding sustainability: since 1996, the number of mass protests about environmental issues in China has grown 29% per year.

Tesla's svelte electric-powered Model S vehicle combines both aspects of China's Dream: material luxury and sustainability. With that value proposition, Tesla will challenge competitors like Volkswagen's  (NASDAQOTH: VLKAY  ) Audi and BMW  (NASDAQOTH: BAMXF  ) as China's salient luxury automobile status symbol. China's wealthy class will buy Teslas not to get from point A to point B, but because Tesla embodies a dream.

Trickle-down Tesla-nomics
Once China's rich bite on Tesla's electric lure, the nation's less wealthy consumers may follow once Tesla releases a cheaper model. That's why Tesla was smart to list its Model S at the same price in China that it sells for in America. While China's rich will not feel the pinch of a few hundred thousand yuan's difference in price, the move received applause across China's social networks and won many Chinese consumers' respect for Tesla.

Such consumer respect will matter for Tesla's bottom line soon because the company is already thinking past its rich early adopters and moving toward courting China's dreaming masses. With the slated introduction of a cheaper model within about four years, Tesla's primed to penetrate the Chinese auto market with a branding strategy distinct from its luxury rivals: sell cars that combine social status and sustainability, all at a price affordable by a broader base of Chinese consumers.

Investors should also keep in mind the potential downside of Tesla's China pricing parity. Tesla may risk diluting its premium brand status, unlike luxury competitors Audi and BMW. Tesla could also be forgoing lofty profit margins, considering that China's rich certainly would pay higher prices.

Competing for China's Dream
Although Tesla blends China's desires for luxury and sustainability into its vehicles, the carmaker faces serious competition. Namely, Audi and BMW are hot sellers in China's luxury auto market: As of last year, they were China's No. 1 and No. 2 most desired luxury car brands, respectively.

What's more, car blogger enthusiasts recently spotted a BMW 530Le plug-in hybrid made for China. When and if BMW and Audi compete seriously with Tesla for the luxury electric-car market, it may erode Tesla's sustainability advantage.

If China's Dream mirrors the American Dream, Chinese consumers pressured to "keep up with the Joneses" may eschew Tesla to buy what their upper-class peers already drive: Audi and BMW. No doubt, Tesla must fight hard to gain ground within the saturated Chinese luxury car industry, but its fair pricing policy and inherent sustainability may present dreamy selling points for many Chinese consumers.

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  • Report this Comment On April 02, 2014, at 9:18 AM, ralphrides wrote:

    it would be insane to buy EV in China, 1st they are way over priced compared to other gas models, 2nd pollution from burning coal to make electricity! running a modern gasoline engine car with current clean burn technology is way way way less polluting than burning even more coal to charge the EVs. The other issue is to charge an EV you need an additional 70,000 watt hours in you home of office per EV! That means if you currently have 200 amp service at your home you either have to turn every appliance off until that EV is charged or add another 100 amp service! its nuts, silly, insane, makes no sense, ug! I give up!

  • Report this Comment On April 02, 2014, at 9:35 AM, SteveTG3 wrote:

    ralph, if you are correct that EVs are worse for the environment than gasoline powered vehicles, why do you suppose the Chinese government is pushing so hard for EVs?

  • Report this Comment On April 02, 2014, at 10:26 AM, Tobyyyyy wrote:

    Since when does the sun pollute....

  • Report this Comment On April 02, 2014, at 10:40 AM, Haeze wrote:

    @ralph

    Keep spreading that FUD that has been disproven time and again. Even the worst coal firing plant with no environmental controls on a per-car basis is on equal ground with the best petrol powered vehicle as far as pollution is concerned. Add to it, the fact that cars largely charge at night, making the grid more efficient since they are not burning extra coal to keep the turbines ready for use in the morning. This is when coal plants are least efficient because there is no one using the power they generate and it goes to waste.

    Another positive effect of going electric, is when they replace the coal plants with a new technology, they instantly made every electric car that charged from that plant more efficient (something ICE vehicles can never accomplish since they quickly degenerate into more and more pollution production as their seals begin to leak and their parts wear down).

    I am also curious where you get this idea that you need some insane electric main coming into your home. I have owned a model S for 8 months now, and my house has a 100A (220v) main coming into the house. I have been charging the car on a standard 110v outlet since I bought it. I have had no breakers trip in that entire time, and I have suffered no range anxiety. The figure you sited of needing 70 kWh in your home is completely unfounded. The only way that would be necessary is if you needed to charge the car from empty to full in less than an hour. There is currently no hardware approved for use in the home that is capable of that amount of power.

    The majority of what you said in your comment is an outright lie.

  • Report this Comment On April 02, 2014, at 10:42 AM, Haeze wrote:

    @Tobyyyy

    The Sun barely shines in China due to all the pollution.

  • Report this Comment On April 02, 2014, at 1:33 PM, ralphrides wrote:

    the mode S charger specs are 70 amp 240 volt and to reach a full charge takes 3.5 hours, do the math. and at $100,000 per vehicle based on 13 cents a kilowatt hour and compared to a gasoline vehicle that gets 40 mpg at $3.50 a gallon and costs under $20,000 it would take you over 20 years to reach an ROI assuming you used both vehicles every day and drove at least 100 miles per day.

  • Report this Comment On April 02, 2014, at 1:55 PM, ralphrides wrote:

    yes EVs can be much worse for the environment for a few reasons. the first is there is not currently enough surplus grid power to charge replacement EVs in the US and Canada and this is much worse in other countries. Based on the est 7.2 million EVs that would be needed to replace gasoline vehicles in the US and Canada their charging requirements would require an increase of 60% in available grid power by conservative estimates. The US electric grid has only about a 5 to 10% excess average and is actually under sized as can be documented during HVAC cooling season with brown outs and outages. Most of the US electric grid is powered by coal like it or not. Even with Best Available Contorl Technology BACT coal is very dirty, high NOx, high particulates and coal ash, its full of heavy metals look at recent ash spilled into the NC river event. Second EVs require a lot of new mining of lithium to make all the batteries and at cost they are currently costing $10,000 per vehicle in China! so that cost is not going to drop anytime soon so the idea of a cheap under $20,000 EV is not going to happen. Third and the most environmentally damaging is that no EV batteries are being recycled, there is no cost incentive to do so and no facilities to do so. On top of this the current method to recycle batteries is to use lots of energy to grind them up and lots of acids and water to extract the lithium, cobalt, nickle and other salts and more energy to reclaim the materials. This process is very costly and the option will be to land fill them or ship them to a third world country that has lax environmental laws and all that stuff will just be dumped into the environment.

    The only sustainable EV would be to use renewable hydrogen fuel cell technology similar to the current hybrid vehicles with a much smaller battery, that can be charged from the grid but who's primary power is not from an on board gasoline generator like current GM Volt, Prius, etc but from a hydrogen fuel cell and or a natural gas interim fuel cell until Hydrogen from solar is fully implemented,

  • Report this Comment On April 02, 2014, at 2:23 PM, ralphrides wrote:

    Q ralph, if you are correct that EVs are worse for the environment than gasoline powered vehicles, why do you suppose the Chinese government is pushing so hard for EVs?

    A China is driven by economics and greed among its Communist leaders. They got into a problem buying all the old polluting coal power plants from the US and Europe and are looking for a solution. There is none, they have coal and will use it. They need to put BACT or better yet MACT ie maxium stack controls on the plants they have but it costs about 30% of plant initial cost to do so. They are now trying to install solar but the ROI on solar in a best calculation is maybe 15 years and that does not include cheap natural gas that the US and Canada my be sending soon so solar is not going to replace fuel burning power generation. I believe that EVs are being pushed to develop a world market to sell them cheaper than Tesla and GM can since all the batteries are currently made there now and they have such facilities in place and the technology base.

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