Tesla Shifts Strategy To Tackle Problems In China

Complications surrounding charging misconceptions and regional differences have stalled Tesla’s sales in China, leading the company to revamp its approach throughout the region.

It wasn’t that long ago that the electric carmaker projected that the Chinese market would match – or even top – sales in the U.S.

China “could be as big as the U.S. market, maybe bigger. I don’t want to get overexcited about it,” Tesla CEO Elon Musk said in January. “Even without building there locally, it’s always going to be the second-biggest market after the U.S.”

But reports of 2,000 Teslas “languishing” unsold and layoffs of 30-percent of the company’s regional staff indicate major setbacks for the carmaker.

“Musk said that China sales have grown steadily in the last three months,” Bloomberg reported in March. “But researcher JL Warren Capital says 260 Model S sedans were registered in China last month, down from 469 in January.”

Tesla isn’t giving up on the region, though, and is making changes to the company and its car in order to revive the Chinese market.

“It is clear that we need to think of China in a very long-term way. We need to steadily boost the confidence of the Chinese consumers,” Musk said.

Localizing Production

One of the biggest changes focuses on production. Tesla is planning to shift a portion of its assembly and development to Asia, with changes possible by 2018.

“We have a strong long-term commitment to China, and we intend to establish both local production and local engineering in China,” said Musk.

This may help prevent unsold Teslas from accumulating in the country, as they are now.

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“China is the only place on Earth that we have excess inventory. We are essentially selling cars that speculators ordered but we are not able to take delivery on,” Musk explained.

In order to keep prices competitive, Tesla has also decided not to pass on shipping or other importation costs to customers, a typical practice for carmakers that can drastically increase the car’s final price. By localizing assembly plants within the region, Tesla will be able to cut out these fees and boost its per car profit margin.

Charging Challenges

Range anxiety is always part of the conversation for first-time electric vehicle buyers. But in China, rumors of EV problems (such as losing charge during a traffic jam or the inability to find a charging station) have made customers fearful of the Model S.

Tesla has pinpointed these misconceptions as a key cause to slow sales in China. And Musk admits that some of the incorrect information about charging electric vehicles even came from within the company.

“This sounds kind of brain-dead, but our sales team was telling people that it was difficult to charge in China, even though this is not true,” said Musk earlier this year.

Tesla is addressing these charging worries by retraining sales reps and highlighting success stories from real customers. The company is giving new customers a home wall-charger at no cost, with free installation in their home.

And, going one step further, a mobile connector that can plug into any outlet is now included with the Model S.

Tesla's estimated Asia Supercharger locations, predicted to be in place by the end of 2016.

Tesla’s estimated Asia Supercharger locations, predicted to be in place by the end of 2016.

“It’s a really slow charge, but it’s just an ease of mind kind of thing to keep with them,” Hsu said. “If they need to, they can find a plug anywhere and plug in and get a charge.”

Superchargers and stations in hotels and malls are already in place, giving owners more than 1,000 public charging options, with more planned in the next 20 months.

Many potential buyers are still hesitant, however, and it will most likely take some time for Tesla to restore confidence in the range of the Model S.

The Importance of Opulence

Unlike in the U.S., a large portion of the clientele in China that can afford a Tesla won’t be behind the wheel — they will be in the backseat, a chauffeur at the helm. For these buyers, the rear seats of the Model S came across as austere and unappealing.

“We know Chinese customers like to be driven so they want something a little plusher,” said Dan Hsu, a Tesla executive based in Shanghai. “That’s one of the benefits of our direct-sales method. We can react much faster to these types of requests.”

Tesla Model S Optional Executive Seats

Tesla Model S Optional Executive Seats

In response, Tesla added an “executive rear seat” option. This swaps the bench seat out for two heated leather seats and gives rear passengers control over media and climate settings. With all the required packages that accompany it, the upgrade adds $7,000 to the purchase price.

While the extras help, the package doesn’t add all of the creature comforts that wealthy clients want.

“There are some features that we don’t have in China yet, but they’re coming,” Hsu admitted.

“That’s one of the great things about our platform, is that it’s all available via software upgrades. We want to innovate as fast as possible.”

The Chinese market is not only attractive for Tesla now, said Musk, but long-term as well. With the region representing a major portion of Tesla’s future potential, it’s even more imperative that these changes in strategy turn sales around.