Why Tesla Motors Will Begin Building Cars in China Soon

Tesla Motors hopes to corner the Chinese market and drive down costs by building a factory in the country.

Apr 23, 2014 at 7:00PM

Tesla Motors (NASDAQ:TSLA) kicked off its official entry into the Chinese market this week. The electric-car maker's chief executive, Elon Musk, was in Beijing on Tuesday for the first deliveries of Tesla's Model S sold in China. The company eventually hopes to unlock new growth opportunities by expanding its operations in world's largest auto market. But expanding its sales throughout the region would ultimately require Tesla to manufacturer its cars there.

Why local made EVs make sense in China
In a recent interview with Bloomberg, Musk said, "At some point in the next three or four years we'll be establishing local manufacturing in China." This move makes sense, as it would mean Tesla would no longer pay China's 25% import tariff, thus helping to reduce the cost of its Model S in China. Down the road, this could help the company sell more cars in the Chinese market.

Tesla is already heavily promoting its pricing strategy in China, and producing cars locally would further electrify its efforts. The company is currently selling its Model S powered by an 85-kilowatt battery for 734,000 yuan. That translates into roughly $118,000 U.S. dollars, which is fair because it reflects what Tesla must pay in Chinese taxes, duties, and shipping costs.

Musk was quick to tout the company's pricing strategy ahead of its entry this week into the Chinese market. "We know that our competitors will try to convince Chinese consumers that our relatively lower price tag means the Model S is a lesser car, when the real reason their car costs more is that they make double the profit per car in China compared to the United States or Europe, he said. By offering Tesla's Model S at a fair price in the Asian country, Tesla should be able to drive up demand for its EVs.

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Source: Tesla Motors

Perhaps more importantly, if demand in China is as strong as Musk thinks it will be, than Tesla will be building a manufacturing plant in the region at the early end of its three- to five-year projection. After all, he expects sales in Europe and Asia combined will be almost twice that of North America by the end of 2014. Not to mention, Tesla's Beijing store is already its largest and most active retail location in the world, according to a recent shareholder letter (link opens a PDF).

Turning setbacks into opportunities
Tesla's all-electric cars don't currently qualify for Chinese EV subsidies, which could be viewed as a setback for Tesla selling its cars there. To offset this, Tesla plans to invest hundreds of millions of dollars in charging infrastructure in China. Building out its charging stations across the region would enable Chinese Model S owners to travel for free between major cities such as Beijing and Shanghai. Using Tesla's Supercharger network is free for Model S owners, which should help incentivize Chinese drivers to buy Tesla cars.

Additionally, with its network of free charging stations, Tesla would gain a competitive edge over rival EV carmakers in the region. Together, smart pricing and free charging should provide the impetus for strong demand for Tesla's cars in Asia. Therefore, it will likely be sooner rather than later that Tesla begins building its cars in China in order to lower costs and keep pace with demand.

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Tamara Rutter owns shares of Tesla Motors. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of 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.

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