Tesla's Model S in Hong Kong. Source: Tesla Motors.
When you get right down to what makes a successful company, and thus a winning investment, it's really simple. All that's really necessary to succeed in business is to find a problem and create a product or service to fix the problem -- that's it.
This is why Tesla Motors (TSLA 1.05%) investors should be thrilled, because one very large problem in the world's largest automotive market can theoretically be solved by Tesla's Model S. Heck, not only does Tesla's Model S represent a major solution for one of China's biggest problems, which we'll discuss in a minute, it's arguably the best vehicle ever made -- sounds like a win-win situation for China, Tesla, and investors.
Here's the ongoing development in China and two reasons Tesla stands to reap massive rewards in the years ahead.
What's the problem?
The explosive growth in China's economy over the last two decades has brought with it some new problems for the country, and big ones. One significant problem facing China is the severe air pollution in major cities. Because of the ridiculous amount of pollution in China's air its government has been very vocal and active in encouraging sales of electric vehicles, which could significantly reduce the country's air pollution.
Unfortunately, even with government backing, China remains far behind its target of 500,000 electric vehicles on the road by 2015 -- it's only managed to lure 70,000 onto its roads. That brings us to the first reason Tesla stands to gain from China's encouragement of electric vehicles.
Tax breaks and mandates
To help further fuel sales of electric vehicles, China's government has continued to unleash incentives for EV's in the automotive market. The importance of these tax breaks and incentives can't be understated as Tesla's Model S starts with a 50% price premium overseas (roughly $121,000) due to import taxes.
Tesla plans to produce vehicles in China in a few years. Source: Tesla Motors
Recently, China decided to waive a 10% purchase tax for electric vehicles, including Tesla's imported Model S, through the end of 2017. Better yet, in addition to any of the central government's tax breaks or incentives, local governments can also offer their own subsidies of up to 60,000 yuan, or about $10,000, for purely electric vehicles.
China's desire to promote electric vehicle sales goes beyond incentives, as well.
China is now mandating that electric vehicles make up at least 30% of government vehicle purchases by 2016. Now, to put this development into better perspective, consider that the Chinese government's vehicle purchases make up less than 10% of the country's new vehicle sales. Even using China's sales figure from 2013, which is expected to grow rapidly, that would equate to 2.2 million electric vehicle sales from the government annually by 2016.
That massive sales potential should have Tesla investors drooling. As exciting as this potential is, we also have to keep in mind a vast majority of these government purchases aren't likely to be a luxury Tesla Model S. However, Tesla's aided by the fact that tax breaks and subsidies have brought the vehicle's price tag down, and that's in addition to Tesla avoiding the industry pricing norm, which is to jack up prices for no good reason.
So, it's very evident that part of China's solution to its pollution problem is to introduce incentives and mandates to heavily encourage electric vehicles sales. On top of that, another reason Tesla stands to reap rewards in China is the market itself.
Hitting the sweet spot
Automaker's are clearly looking overseas to China as the land of future growth opportunity. China is already the world's largest automotive market, and yet it still grew at nearly twice the pace of United States' market last year!
Even better than its overall size, and accelerated growth pace, is that niche vehicle segments are expected to surge soon. Among those segments are luxury and, of course, electric vehicles not limited to government purchases. China's luxury and electric vehicle segments are expected to become the largest on the planet over the next four to five years, according to BMW Group. Fortunately, Tesla's Model S is one of very few vehicles, if not the only one, that has the ability to rank atop both of those surging markets.
Bottom line
China offers Tesla an opportunity to take its sales to new heights, and if the young automaker reaches its sales goals of 200,000, and then 500,000, units, China will be a large reason for that success. Even if China's new tax breaks and mandates aren't enough to generate incremental sales for Tesla, because of the Model S's high price tag, it will only be a delay to the inevitable success Tesla will have in the country.
One way Tesla could bring the price of the Model S down to capitalize on the country's potential is to begin production in China, which would alleviate those costly import tariffs. Also, when the automaker's more affordable Model III vehicle hits the markets in a few years with a price tag of around $35,000, it could be a complete game-changer in China, and across the globe.
Tesla still has much work to do in China to turn this massive opportunity into a reality, such as building out its Supercharger infrastructure and becoming more price competitive, but it's easy to see why investors are very excited about the company's prospects overseas.
