Tesla, China, Rapid Reactions, And Uncertainty

| About: Tesla Motors (TSLA)

Summary

China's government is generally wary of foreign companies.

China's consumers are relatively active on social media.

China's government has shown a willingness to react to outcries on social media in the past.

Tesla needs to manage their current situation carefully.

A westerner's view of China's historical backdrop

It's rare that we get to indulge in history when looking at a company's finances. While I wanted to wait until September 18th to publish this piece, the recent autopilot crash presents a good opportunity to address the issue of Tesla's relations with Chinese consumers.

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Ever since the Opium wars, China has been adverse to foreign trade and influence (to put it lightly). While the war is over 150 years old, it affects public opinion to this day. The result of the wars ended up leading to the creation of Hong Kong, and eventually ended the Qing dynasty. The loss of this dynasty lead to a divided country unable to modernize quickly in the years leading up to world war II.

Influence can be found in education: students learn about the aptly named "Century of Humiliation".

In the public arena, nationalists use China's unfortunate circumstances during that era to justify protests and attacks on foreign companies.

This sore spot is a factor in China's recent actions in the South China Sea (though resources and influence are certainly larger factors).

China very much sees foreign trade occurring within China as neutral or even detrimental, rather than beneficial. The governments, and to a certain extent, China's citizens, begrudgingly accept trade as a way to enrich themselves.

This historical context needs to be taken into account when assessing the risk to Tesla's access to the Chinese market.

I both understand and foresee the complaint that it's unfair to blame Tesla for irresponsible driving behaviors. However, the driver asserts that he was led to believe the car could drive itself (more on that later).

Regardless, that argument is not terribly important in this context. Regardless of your, my, or anyone's opinion on what's fair, China's government will gladly sacrifice the perception of fairness in order to show their citizens that they care about public safety and resist less-than-desirable foreign influence.

China arguably sacrificed fairness for less in the infamous X5 clone lawsuit. Should there be any legal issues with regards to Tesla forthcoming, there is no reason to expect Chinese courts to give Tesla better treatment than BMW - especially when BMW was not even accused of making false/misleading claims to Chinese consumers.

Social media and commerce in China

So, there was one Tesla autopilot crash in China, not a big deal, one might argue. Well, in the day and age of Weibo, even the smallest of stories can go viral in a major way. Social media is shaping China the way radio and later TV shaped the United States back in the 20th century.

Social media's power in China cannot be understated. China Business Review has an excellent piece illustrating just how active Chinese consumers are on social media when compared to their Western counterparts. I recommend giving it a read.

http://www.chinabusinessreview.com/social-media-in-china-the-same-but-different/

China's Government is also very sensitive to the pulse of social media. They pump out hundreds of millions of fake posts every year. In addition to bring proactive, they are reactive too, to the point that they will shut down cities when pollution reaches extreme levels.

Experts speculate this policy of city-wide shutdowns was due to public outcry about the pollution levels, rather than actual concern about health. I am inclined to agree, given that the protests in 2012 over the Senkaku / Diaoyu islands issue were tolerated, if not encouraged, by the government.

So, when a customer uses their 15 minutes of fame to do the following:

"Unsatisfied with Tesla's initial response to his crash, Luo posted pictures and a video of the crash on Chinese social media platform Weibo describing the incident and criticizing the company."

it is quite worrisome. Moreso than it would be in the United Sates.

Unfortunately, other drivers don Click to enlarge

Unfortunately, other drivers don't always stay between the lines.

The customer went on to say:

"They use this immature technology as a sales and promotion tactic... but they don't take responsibility for the safety of the function."

While that comment doesn't sound exceptionally harsh in English, direct accusations are quite uncommon in Chinese. That is to say, this comment is an indictment of Tesla.

However, that indictment is also an offer: By not taking on harsh rhetoric, this customer is giving Tesla the chance to make amends. If Tesla does not make any further attempt to satisfy this customer's concerns, we can expect the complaints to continue and spread like a virus, particularly if additional accidents occur.

If Tesla plays nice, this whole thing can be turned into a non-event, or even leave China with a positive impression of the company. Best not to leave China with the impression that Tesla is playing the Chinese for fools. As previously covered, China has already had a century of that, their patience with such antics is very limited (Though perhaps not as limited as Tesla's ability to secure new debt).

Conclusion

Owing to a beleaguered history and a need to keep its approval ratings up, China's ruling party is always happy to do a couple things:

  1. Clamp down on foreign companies doing business in China
  2. React to outcries on social media (provided said outcries are not about government policy)

Add to that the fact that social media in China might as well be on steroids, and it's easy to see why public perception matters even more in China than it does here in the United States.

In my opinion, the NHTSA is not likely to move on Tesla just because of one fatal accident where the driver was being negligent. However, China's regulators have a bit more latitude to be overzealous and act in the name of crushing corruption, one of Xi Jinping's themes for the current administration. This latitude for action will only increase if the narrative of "Tesla is lying about the capabilities of autopilot" takes hold on Weibo.

Tesla has shown with their refusal to sell to a "rude customer" along with their "a grain of salt" and "Misfortune" blogs that they are less than perfect at managing public perceptions in the U.S.. Managing PR in China arguably requires even more caution and a willingness to adapt.

Even just a tiny minority of upset customers can have an outsized effect on what is supposed to be, and needs to become, a major market for Tesla. While one can argue that China is unimportant in terms of sales, I would take it from Elon himself:

"I think [China is] really important. I think it could be as big as the U.S. market -- maybe bigger."

Well said, Elon.

If Tesla is not careful, negative PR in China could become an albatross for the company.

Disclosure: I am/we are short TSLA.

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.