Model S Photo Gallery
Source: Tesla Motors

What Tesla Motors (NASDAQ:TSLA) has already accomplished in its short lifespan is quite impressive. Merely increasing sales from 2,000 to 20,000 a year was enough to impress automotive executives and entrench the electric-auto maker (and its soaring stock price) as a Wall Street Cinderella story.

Of course, Tesla CEO Elon Musk has his sights set on a much bigger goal, but going from 20,000 sales to 200,000, and eventually 500,000 per year, will force the company to successfully execute additional vehicle launches and to enter new markets. Perhaps the biggest factor in reaching 200,000 yearly sales will be determined by Tesla's success in China.

Massive potential
China's market for electric and luxury vehicles is set to boom alongside its growing middle and wealthy classes. In addition to the nation already being the world's largest overall automotive market, BMW Group predicts that China will soon become the world's largest market for electric vehicles within five years.

China's government is encouraging electric-vehicle sales in an attempt to reduce pollution. The nation began promoting electric vehicles about five years ago, but it has only managed to lure 70,000 onto its roads -- far behind its target of 500,000 by 2015. However, if the government continues to promote electric vehicles, Tesla's recent entry into the market with its Model S could prove very timely to catch a potential surge in sales.

While the sales potential for Tesla's Model S is huge in the world's largest automotive market, it faces many market hurdles.

Jumping hurdles
Tesla's plans to enter the market hit an early speed bump when businessman Zhan Baosheng registered papers trademarking the "Te Si La" name in the country. Though the issue was resolved, it was an unwanted distraction to the beginning of Tesla's story in China.

Model S Photo Gallery

Source: Tesla Motors.

The first real issue Tesla will tackle in China is a familiar one: building its Supercharger infrastructure. Tesla plans to invest hundreds of millions of dollars there to build out its network of vehicle-charging sites to eradicate range anxiety and enable simple long-distance traveling for Model S owners. Tesla's instructions to its team is to efficiently spend as much money as needed, as quickly as possible, to build the Supercharger infrastructure in China. With cooperation from the government, progress should come faster than anticipated.

Another looming hurdle for Tesla is the need to understand a substantially different consumer, something that has taken other automakers years to accomplish. Tesla, though, seems to be learning the market and plans to offer a slightly different version of its Model S to meet the needs of the Chinese consumer who prefers to be driven while conducting business in a roomy backseat.

Perhaps the biggest near-term hurdle for Tesla will be lowering the price of the Model S. When Model S deliveries to China began two months ago, the price was about 50% higher than it is in the United States. Musk made clear that the price hike was only to cover shipping costs and taxes, and that if the company followed standard industry practices the car's cost would have increased from the roughly $118,000 it currently goes for to as much as $160,000.

"They're basically calling us huge idiots for not ripping off customers in China." Musk said, according to Automotive News. "I don't think ripping off customers is a good long-term strategy."

Tesla's determination to provide its vehicles at a fair price may have won over some consumers, but lowering the cost will mean instituting production in China.


Source: Tesla Motors

Tesla intends to begin manufacturing in China within a few years. However, the nation's regulations would force Tesla to enter into a joint venture with a Chinese company. That will definitely be a development for investors to keep an eye on.

One factor in the automaker's favor when it comes to sales numbers in China is that the central government is likely to offer subsidies for purchases of purely electric vehicles. In addition to those central government subsidies, local governments can tack on additional subsidies for up to 60,000 yuan, or roughly $10,000. All those subsidies could lower the price of Tesla's vehicles substantially before the company even begins production in China.

The takeaway
If the young automaker can bring its prices down, build out its Supercharger infrastructure, launch additional vehicles, and begin production in China within a few years, Tesla's jump from selling 20,000 vehicles to 200,000 will be attainable sooner than investors think.

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Daniel Miller has no position in any stocks mentioned. 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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