Mar 18 2014, 1:36pm CDT | by Forbes
When 35-year-old Eric Zhu deliberated to which car his family should upgrade, Tesla Motors didn’t stay long in the race.
Zhu, who works as a senior manager at a Western industrial firm in Beijing, is drawn by Tesla’s 100% electric power and zero emissions promise. As a father of a two-year-old boy, Zhu is willing to compromise a lot for the sake of clean air.
“But owning a Tesla right now in China is just too impractical,” he sighs. “We need a car that can take us back to our hometown on muddy roads, or go on a road trip to Tibet. This is Beijing. It’s not like we can own two cars.”
To win over Chinese consumers like the Zhu family, the Palo Alto, California-based Tesla Motors needs to succeed where other innovative American tech companies have failed.
Google Inc., for example, exited the Chinese market after four years’ of operation. Facebook and Twitter have not yet been able to enter the market. Apple Inc. is still waiting for China sales to meet hefty expectations after it struck a deal with China Mobile last December.
There is little evidence that Tesla will be the exception.
Tesla is scheduled to deliver its ultra-modern electric vehicles to Chinese consumers next month. But there is practically no recharge infrastructure, and no policy support for Tesla in China. Both will take time to tackle. Not to mention the fierce competition in the world’s largest automobile market.
The company’s stock has doubled in the past four months, largely due to projected demand from China. But billionaire co-founder and chief executive Elon Musk, as well as investors, may soon realize that the Chinese market is much harder to navigate than they think.
“They are assuming the Chinese consumers behave the same way American consumers do. Chinese consumers are environmentally conscious, but they are also very pragmatic,” says Jack Perkowski, founder and managing partner at JFP Holdings.
Perkowski previously founded ASIMCO, one of the largest auto components companies in China.
Beijing To Shijiazhuang: Mission Impossible?
Musk has projected that sales of its electric Model S cars in the Chinese markets should match U.S. levels, which totaled 22,450 in 2013, as early as 2015.
It is an ambitious projection. Porsche, for example, sold 37,425 cars in China last year. But that is 10 years after it sold its first Porsche Cayenne in the country.
The more mind-blowing aspect of that projection is how little infrastructure and services Tesla provides in China.
Currently, Tesla drivers in the U.S. have three ways to recharge their EVs. One is a high power wall connector that can be installed inside owners’ garages. This adds electricity to drive 58 miles per hour of charge with a twin chargers installed.
The second method is a mobile connector, which can be plugged into any electricity outlet. This adds 28 miles of drive per hour.
The last option is at one of Tesla’s supercharger stations, where 30 minutes will add enough electricity to drive around 170 miles. All for free.
There are currently 79 Tesla supercharger stations in North America. The company has plans to build a lot more to cover 80% of the U.S. population by 2014, and 98% by 2015.
For Chinese consumers, there is only one way to recharge: the high power wall connector.
This means Tesla drivers in China are limited to a circle of less than 150 miles in radius with their home as the center. For someone who lives in Beijing and needs to drive to Shijiazhuang, the capital of Hebei province that is 170 miles away, Tesla will fail the task. Not to mention if the car runs at a higher speed, its distance per charge will drop further.
Moreover, it is extremely difficult for Chinese consumers to install Tesla’s high power wall connector in their garages. Except a tiny portion who can afford to live in luxury villas with their own garages, almost all of the Chinese urban population live in apartment buildings, where cars are parked in a large parking lot.
To install a recharge pole requires months of negotiations, obtaining numerous permissions and dealing with bureaucracies. One EV owner, who asked to remain anonymous, was able to install a recharging pole (not for a Tesla) next to his parking spot in a large residential community in Eastern Beijing. But it took over six months of painstaking time.
Tesla currently does not provide any support or assistance for customers to install recharging poles. Tesla’s China press office did not respond to requests for comments.
“The initial fad factor will be very high, but over time the expense and inconvenience will be a challenge,” says Gary Rieschel, founding managing partner at Qiming Ventures, a Shanghai-based venture capital firm with $1.1 billion under management, with clean tech one of its key focuses.
Services and repair will be another headache. At present, Tesla’s Beijing store is the only service center in China. All Chinese buyers have to go there to pick up their vehicles. And, there is only one place for repair, at the Jin Gang Auto City in a northern suburb of Beijing.
As a comparison, Porsche has 63 service centers in China built over the past 10 years.
Tesla has plans to build a national network of supercharge stations and more service centers in China, but it will be years before it can be realized.
“Every EV company has a different battery, different charging stations. Trying to standardize the infrastructure sounds to me like a challenge,” says Jack Perkowski, founder and managing partner at JFP Holdings. Perkowski founded ASIMCO, one of the largest auto components companies in China.
Moreover, electricity supply in China is monopolized by state-owned electricity company State Grid . Tesla must make an agreement with that company if it is going to provide free electricity to its car owners, according to a State Grid executive quoted by Chinese media.
“The ‘green’ irony is that EV’s in China would almost entirely be coal electricity fueled, which on balance can be questioned in terms of fossil emissions,” says Chris Rynning, CEO of Origo Partners PLC, a Beijing-based private equity firm focused on the natural resources and clean tech sectors.
No China Subsidies For Tesla
A constant point of debate in the green tech sector is: Will the sector, whether it’s solar power, wind, or EVs, stand on its own without government subsidies or policy support?
Tesla in China will provide an interesting experiment on the question, because Chinese consumers currently do not receive any subsidies or preferential treatment if they purchase a Tesla.
Beijing recently announced a list of EVs that will receive subsidies ranging from RMB63,000 to RMB108,000. The six EV models on the list are DENZA and E6 made by BYD; Roewe E50 made by SAIC Motor; ZINORO made by Brilliance Auto; E150 EV and C70GB made by Beijing Automotive Group; and iEV4 made by JAC Motor.
According to the Beijing Demonstration and Application of New Energy Passenger Car Manufacturer and Product Administration Rules released by the Beijing municipal government, only EVs that are domestically manufactured, or manufactured by a Sino-foreign joint venture, will be considered to be on the list to receive subsidies.
China’s central government has also announced subsidies for EVs, which include RMB60,000 for a pure EV and RMB35,000 for hybrid models.
But these vehicles are selected from the Vehicle Production Enterprises and Products Announcement released by the Ministry of Industry and Information Technology, which also only include models manufactured by domestic or joint ventures car-makers.
In Shanghai, eight EV models manufactured by six companies are included in its subsidy list. Shanghai government offers EV purchasers RMB40,000 for a pure EV and RMB30,000 for a hybrid plug-in. On top of that, buyers can get free license plates, which cost around RMB70,000 in Shanghai.
All the subsidized EVs in Shanghai are also selected from the list made by the Ministry of Industry and Information Technology. They include Qin and E6 made by BYD, Chevrolet Springo made by Shanghai General Motors, Riich M1 made by Chery, Roewe E50 made by SAIC Motor, E150 EV made by Beijing Automotive Group, iEV4 made by JAC Motor and another model under Lifan Auto.
China’s current subsidy policy means that Tesla will not qualify to receive subsidies until it starts manufacturing its EVs locally in China. But Musk has said that Tesla will not move manufacturing to China in the foreseeable future in an earnings conference call in February.
Aside from providing zero subsidies, Tesla also could not offer another important benefit to its potential buyers: a license plate.
In Beijing, drivers need to win a lottery to get a license plate. The average winning rate is as little as 0.9%. Buyers of EVs, however, don’t have to go through the lottery as the government reserves special license plates for new-energy vehicles. But this treatment only applies to the recognized EVs on the government’s subsidy list.
Tesla buyers have to scramble for a license plate in the same lottery with all gasoline-powered sedan buyers. Even if they win the lottery, it may expire while they wait for their Tesla to be delivered. The current wait time in China is about one year.
There are no other preferential benefits for Tesla owners in China either. In Norway, for example, Tesla owners can drive in the bus and taxi lanes, can park for free, and have no limits on how many cars they own, says Origo Partner’s Chris Rynning.
None of these benefits are available to Tesla owners in China.
Tesla says it is negotiating with Chinese local governments about the possibility of receiving subsidies and other benefits.
But if Tesla can obtain such support in the future, it has to maneuver widespread local protectionism across China.
The central government has specified in its new-energy vehicle development plan that at least 30% of the subsidized vehicles should come from a non-local carmaker, but analysts do not expect local authorities to favor a foreign company like Tesla, which does not contribute to their revenues.
Tesla vs. Seasoned China Competitors
Aside from being the largest automobile market in the world, China is also projected to be one of the largest electric vehicle markets by 2020, according to forecasts made by the International Energy Agency .
The potential has attracted all major auto companies in the world. Tesla needs to compete with many competitors who are more seasoned in the local Chinese market.
BMW AG , which established a joint venture with Shenyang-headquartered Brilliance Auto in 2003, announced last year that its first electric model i3 will be launched in China this year.
Volkswagen Group entered China in 1984 and currently has two joint ventures in the country. Its Volkswagen and Audi brands plan to launch more than 15 plug-in cars in China by 2018.
Plug-in cars can be powered by a small gasoline engine when it is drained of electricity, and these are more suited for the lack of recharge infrastructure in China.
Daimler AG’s Mercedes-Benz has a joint venture with Beijing Automotive Group, and has been in the Chinese market since 2001. Last December, Beijing Benz began locally manufacturing its GLK260 and E400L hybrid models.
In China’s business environment where long-term relationship is key, it’s unlikely that Tesla will be able to make faster progress than its competitors, either on building up the recharge infrastructure, or on receiving government subsidies.
That Tesla is from hip Silicon Valley won’t matter much either. Despite years of effort, China’s EV market has never really taken off. Of the 22 million new cars sold in China last year, only 17,642 were pure electric and hybrid vehicles, accounting for less than 0.1% of the overall auto market.
The Chinese government has set hefty objectives of putting half a million new-energy vehicles on the road by 2015. The figure is projected to reach 5 million by 2020, according to the Planning for the Development of the Energy-Saving and New Energy Automobile Industry (2012-2020) published in 2012.
Because of the large gap between government objectives and real EV sale numbers, some Chinese cities are given “tasks” to promote EV sales. In Eastern China, cities are required to promote no less than 10,000 EVs by the end of 2015, while assignments for the rest were set at 5,000. Shanghai has its own target of 13,000.
There is no doubt that great potential exists for Tesla in China. Just look at other carmakers’ successes.
China is expected to become Porsche’s biggest market in 2014 or 2015. BMW has seen China overtaking the U.S. as its biggest market last year with a record 390,713 vehicles sold.
But it will take time, persistence and the willingness to adapt.
“Tesla has a good product, but it takes a long time to understand the Chinese market,” adds JFP Holdings’ Jack Perkowski.
Maybe Musk should move to China if he is serious about his company’s future here. No one has succeeded in the Chinese market with a remote control.
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