Tesla's Pricing In China Is A Public Relations Win, But It May Not Guarantee Success

Jan.28.14 | About: Tesla Motors (TSLA)

Tesla (NASDAQ:TSLA) recently announced that it will charge 734,000 RMB or just over $120,300 for its Model S in China and appears to have produced a great deal of positive sentiment in the process. Out of the total 734,000 RMB price tag for the vehicle, 114,950 RMB is attributed to customs tariffs and other taxes, 107,085 RMB to VAT, and 21,780 RMB to shipping costs (assuming a 6.05 RMB per USD exchange rate). In the comments section under the announcement of the pricing for the Model S on the company's official Sina Weibo account (Sina Weibo is a twitter-like micro-blog service), users have written many supportive comments.

Out of a sample of 30 micro-blog posts, 16 conveyed a positive sentiment about the price or the car while only one commenter issued a negative comment. The other 13 comments were unrelated to the topic.

The one skeptic among the commenters in the sample was concerned about how Tesla could sell cars at this price while building a network of charging stations around China and still make a profit in the process. Some calculations though show that such a concern may prove to be unfounded. Back in 2012, Tesla estimated that it could build 100 superchargers for $20-30 million. Tesla has achieved a 70+ per-year rate of construction for superchargers in the US and hopes to sell around 8,000 cars in China in 2014. Assuming they build 70 superchargers this year in China at a cost on par with the high end of the 2012 estimate for building them in the US and hit their target of selling 8,000 cars per year, this would add up to revenue of over $970 million and a very liberal estimate of construction costs at around $21 million for the superchargers. Clearly there are other selling, general, and administrative expenses to consider but it would appear that Tesla can at least handily cover the cost of building superchargers in China if it hits its sales targets for the Model S.

On the public relations front, the win emerges from the fact that the difference between the price of the Model S in the US and in China will only be the transportation cost and taxes associated with selling the car in the country. Some other companies that import cars into China have been charging a premium well beyond what can be accounted for by taxes and transportation costs, and Tesla in its pricing announcement remarks that it could "get away" with charging twice as much in China as it does in the US for the Model S. Reports by China Central Television, aka CCTV, and other official government media outlets in 2013 of such pricing practices means there is likely to be enhanced awareness of the issue amongst consumers. One such CCTV broadcast showed how a luxury SUV by Range Rover was selling for 1.89 million RMB in China but only 540,000 RMB in the US.

Thus, Tesla has been given the opportunity to make itself look like a leader in what perhaps could be an inevitable trend towards lower pricing of all imported vehicles. However, whether or not the public relations win will turn into bumper sales within China is still uncertain. To translate one comment on Weibo that could prove to be significant going forward, "The price move is undoubtedly a huge slap in the face of other luxury brands in China. Although I simply can not afford this car, I still want to express happiness from the bottom of my heart."

Indeed, some analysts are predicting sales of only several hundred vehicles for Tesla in its first few years in China, citing a small electric vehicle market and expectations that it will remain small over the coming years. Looking at the slow start for electric vehicles in China overall certainly does not make it easy to be optimistic about predictions for Tesla's initial sales in the country. In 2012, the total number of registered electric vehicles in China was 11,573, while the total number of automobiles sold that year was 19.3 million.

It has also been said that word of mouth reviews by the first Tesla customers in China will be important for the company's future success. If that is the case, it will pay to continue following the social media buzz surrounding the company for hints about how its initial customers are enjoying their experience. Such opinions could prove to be critical for the company's success in China.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.