Why Fears Over Tesla Motors Inc.'s Chinese Price Tag are Overblown

While the price of a Tesla Motors  (NASDAQ: TSLA  )  electric vehicle in the U.S. is anything but cheap, it looks much more attractive than what Chinese consumers would pay. With the addition of import duties, VAT, and shipping, the starting price tag of a Tesla Model S in China is roughly $121,000. CEO Elon Musk has big ambitions for growth in China. He has claimed that as early as 2015, Tesla's annual sales in the nation could equal U.S. sales of roughly 25,000 vehicles. Naturally, the price has raised concerns that a Tesla may be too expensive for Chinese consumers, and that the company will not even reach its 2014 sales target there of between 7,000 and 8,500 vehicles.

However, given improved income demographics, a relatively strong luxury auto market, and regulatory issues tied to car purchases in China, Tesla's sales goals seem attainable. 

China's growing wealth 
Chinese income is on the rise. In 2013, per capita income grew 8.1%. In particular, disposable income was up 10.9% from the previous year. Among urban residents, those most likely to need a car, disposable income increased by 9.7%. 

Furthermore, according to a recent Boston Consulting Group report, last year China recorded the second-highest number of millionaires in the world: 2,378,000, behind only the 7,135,000 millionaires in the U.S. Moreover, China's millionaire growth soared 82% from 2012, compared to an 18% rise in the U.S. This increase was driven by a nearly 50% increase in private wealth, led by the rapidly growing shadow banking sector.

The growth of shadow lending has been a cause for concern, and has prompted Chinese regulators to advocate measures to curtail its growth. Yet the chairman of the Industrial and Commercial Bank of China recently claimed that shadow lending has been productive for the economy. While it's likely that this lending will not see similar rapid growth going forward, it still has room to grow given that it accounts for such a small part of China's overall lending. This increase will result in more Chinese millionaires who are able to afford lavish goods, such as a Tesla. 

A strong luxury car market 

Company 2014 Q1 China Sales  Year-over-Year % Change
Audi  124,520  21%
BMW  108,000  25%
Mercedes Benz  71,661  43%

Source: Bloomberg.com.

Several luxury auto companies have found success in China. Audi, which has been the most successful luxury auto company in China so far, sold a company record 124,520 vehicles in the country for the first quarter of this year.

In the same period, BMW sold roughly 108,000 vehicles, which marked a 25% year-over-year increase. While over half of these sales were the cheaper 3 Series and 5 Series models, the 7 Series with its starting price of $150,000 accounted for 6% of sales in the market, which is roughly 6,500 vehicles.

Daimler's Mercedes-Benz also posted strong first-quarter sales thanks to the popularity of the S-Class in China. The company sold 6,036 in China, accounting for 25% of the model's global sales ,despite its starting price tag of $150,000. Clearly, demand exists in China for the most luxurious vehicles. 

Regulatory factors
The pollution epidemic in China is well known, and it will only increase the demand for electric vehicles as the government attempts to curb emissions. Due to pollution and traffic congestion issues, Chinese license plates are in high demand. Last year, a license plate auction in Shanghai saw a plate sell for nearly $15,000.

However, those who buy a Tesla will receive a free license plate in the city, as electric cars are widely exempt from the bidding system. While this exemption was only for made-in-China electric cars, the Shanghai government announced it would extend the benefit to Tesla. This move suggests that other China cities and regions may extend similar benefits to Tesla as a way to deal with pollution. 

The Foolish takeaway
Paying $121,000 for a car is certainly not cheap, especially in China. However, the country's private wealth is growing, and vehicles above Tesla's price-point have done well in the past year. Moreover, Tesla can take advantage of EV benefits that its luxury competitors can't. Chinese sales will be announced next month in the company's second-quarter earnings report, so we will see if Chinese consumers also feel that Tesla's price is fair. 

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