Despite overwhelming short-term demand, every decision Tesla (NASDAQ:TSLA) makes is strategically done for the big, long-term picture. It should therefore come as little surprise that, with Tesla's announcement of its pricing strategy for China, the company revealed that it will be charging far less than it could get away with.
The blog post
Tesla unveiled the details in a blog post on Jan. 23. The company will be charging the exact same prices to the penny in China that it does in the U.S., plus the standard duties, taxes, and shipping fees. The grand total for a typical Model S in China will come to $121,370.
Tesla believes it has the pricing power to charge double in China, as that practice is common with other car companies in the region. However, the company wants to send the message that it is doing things differently. It acknowledges that it's a risky move because the lower price point compared to competitors' may be seen by some in China as a sign of an inferior product. In fact, Tesla fully expects that its competitors will try to use the price difference as a marketing ploy to say that lesser price means lesser car.
Tesla is opting to take the risk and hopes it results in it being seen as "advancing the cause of electric cars in China." As with many other countries, the company plans to build out its free-to-use Supercharger network across the region. The long-term implications of this entire strategy should be obvious: Tesla plans to make a massive number of electric cars and sell them in China because it believes China will be an enormous market for its vehicles.
Pricing power is worldwide
Let's face it though, Tesla could raise its prices higher right now because demand vastly outstrips production, even without the use of advertising. Its strategy is to increase production rather than prices; as production accelerates much higher, demand will still be there because of the perception that it is a superior car company in every way. Perhaps it still won't have to spend a dime on advertising, something its competitors spend billions on every year.
Recent China comments
China is a big deal to Tesla. In the conference call last November, CEO Elon Musk mentioned that in 2014 the company will be focused on expanding deliveries worldwide "particularly in Asia." The company was then aiming for deliveries to China to begin in February and from there expects "significant growth in the rest of the year." He expected then at least a six-month wait time on any new orders in China and accelerating from there.
In a Jan. 14 interview, Musk again confirmed expectations that deliveries to China will begin being "put on a boat" next month. He said, "The most enthusiastic people about our car are people from China." Last year, the vehicle market in China jumped 14% to 22 million vehicles, compared to just 15.6 million in the United States. This suggests that the market there may ultimately be much more lucrative than the U.S. market, a fact that has not passed by Tesla.
Foolish final thoughts
Tesla's story continues to be more about production than sales. Demand is overwhelming everywhere, and now we have confirmation that sales prices (that Tesla realizes) is the same throughout. With a stock price around $180, Tesla is going to need a lot of bottom-line profit to justify an even higher valuation. Watch for the production figures to accelerate further and for the profit margins on that production also to go much higher. Tesla is targeting 25% gross profit margins in the fourth quarter. If the gross profit margins could head somewhere above 30% while production continues to accelerate, and while the company keeps overheard reasonably in check, then the stock might start to justify even higher prices.