How Big Is Tesla Motors' Opportunity in China?

Selling cars in China is critical to Tesla Motors long-term success. Here's an inside look at how big the opportunity actually is for the electric-car maker.

Jul 9, 2014 at 3:04PM

For electric-car maker Tesla Motors (NASDAQ:TSLA), the Chinese auto market presents both its biggest opportunity and, perhaps, the company's most daunting challenge yet. As the world's largest auto market, China offers Tesla the prospect of growing from a niche EV maker into one of the most well known automakers of the 21st century. On the other hand, the company must fight for its right to use the Tesla name in China -- more on that in a minute. First, let's look at how Tesla Motors plans to corner the luxury auto market in China and what it means for the company going forward.

China takes the wheel
Tesla Motors' chief executive, Elon Musk, is arguably one of the cleverest businessmen alive today. It is hardly surprising, then, that Musk has closely aligned Tesla's goals in the Asian country with those of the Chinese government. For starters, he promised to build out electric vehicle infrastructure by installing Tesla's Supercharger network throughout greater China. The company currently has three Supercharger stations open in China, with many more on the docket.

Tesla also plans to launch service centers in "several large cities in China, like, Shanghai, Guangzhou, Shenzhen, Chengdu and Guangzhou," according to Wu Bixuan, the company's global vice president and head of Tesla China. To sweeten the deal further, Musk said Tesla would build a factory and start manufacturing cars in China in three to four years. While this is all wonderful news for China, there is also something seemingly priceless in it for the EV maker: China's government is pro Tesla Motors.

Screen Shot

Source: Tesla Motors China.

Few foreign companies operating in China today can claim this competitive advantage. In fact, China is notorious for so-called trademark trolls or businessmen that exploit foreign companies attempting to do business in the Asian country. Apple, for example, was forced to pay $60 million to a Chinese company that claimed it had legal rights to the iPad brand. In Apple's case, the suit lasted for years and undoubtedly cost the tech company millions in legal fees.

Tesla suffered its own bout of trademark troll fraud last year when Chinese businessman Zhan Baosheng sued the company for trademark infringement. Chinese authorities ultimately dismissed the case, though Baosheng is now reportedly appealing that decision and demanding that Tesla close its showrooms, service centers, and Superchargers in the country.

However, Tesla differs from Apple in respect to necessity. Unlike iPads and iPhones, China needs a fuel-free automaker like Tesla to help combat its atrocious smog condition. In Beijing, smog requires people to wear face masks when outdoors on an increasing basis and often exceeds World Health Organization limits. Moreover, according to a World Bank report, China accounts for 16 of the world's 20 most polluted cities, as reported by Bloomberg.

Teaming with Tesla
Joining forces with Tesla Motors is a no-brainer given these harsh conditions, and China's government isn't holding back support. Sure, Tesla worked for more than a year to secure the proper licensing and approvals needed to open up shop in China. However, once it had overcome those hurdles the pieces started to fall into place. The EV maker now has two showrooms open in Beijing, and three service centers in the country, including one in Shanghai, with more planned in the months ahead. Demand in China is another bright spot.

After a visit to China earlier this year Musk said, "I was blown away by my visit to China at the level of interest and enthusiasm for Tesla and the amount of goodwill that I encountered from people at all levels, from the government, from people in industry and sort of consumers in general. And I'm really optimistic for how things will go there."

And why shouldn't he be optimistic about Tesla's future in China? After all, the Chinese government appears fully invested in Tesla's success in the region. The Shanghai government even changed the rules so that Tesla Model S drivers in the city would be entitled to free license plates, thereby sidestepping the usual public auction price of $10,000-$15,000 per plate, according to a recent shareholder letter.

In that same note to shareholders Musk said, "We are also encouraged by how fast we have been able to develop our infrastructure in China when the proper support is in place. With the help of the Shanghai government, for example, we were able to construct a Supercharger station within just a few weeks of site selection." Ultimately, if this outpouring of support from Chinese officials continues it should mean big things for Tesla Motors in the world's largest auto market.

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