The Model X Is Just What Tesla Motors Needs In China

| About: Tesla Motors (TSLA)

Summary

TSLA has made strong progress in China, with the country slated to exceed last year’s share of 8% of overall sales and the Model X expected to aid long-term growth.

Though the auto market in China has slowed of late, the SUV segment is doing well and recording aggressive growth, which is good news for TSLA’s Model X SUV.

TSLA’s Model X will benefit from two factors in China – the government’s efforts to reduce pollution and expected growth in the SUV market that’s doing well in difficult times.

Tesla Motors (NASDAQ:TSLA) has made sound progress in China this year, with the company having sold as many vehicles as it sold in 2014 in just the first half of 2015. Last year, Tesla sold 2,499 units of the Model S in China. In comparison, in the first half of 2015, the company has already sold (WSJ links may require subscription) close to 2,200 vehicles in the country, accounting for more than 80% of imported hybrid and plug-in EV sales in China.

But, the economic slowdown in China has taken a toll on the auto industry, with car sales dropping for three consecutive months until the end of August. In addition, there have been instances of cities placing restrictions on car purchases in order to bring down pollution levels in China. However, in my opinion, Tesla growth won't lose momentum due to either of these reasons, driven by the launch of the Model X.

However, before taking a look at the positives, let's take a look at the challenges faced by the Model X in China.

The challenges faced by the Model X

Despite the slowdown in the Chinese automobile market, the SUV segment has continued to boom this year. The segment has grown about 45% since the start of the year, and this is good news for Tesla as it will be able to target this growth hotspot with the Model X SUV. Of course, the rapid growth in SUV sales in China has given rise to increased competition in the market, leading to intense rivalry that has put pressure on SUV prices.

However, Tesla's Model X should not be looked at simply as just an SUV. Its fortunes are not just dependent on how the SUV market in China is doing, but also how the country's electric vehicle market is shaping up. Thus, Tesla will enjoy a two-fold advantage since the Chinese government is in full support of developing the new energy vehicle infrastructure in the country.

What should displease Tesla, however, is that support is mainly for the local manufacturers such as BYD. For example, Tesla enjoys a federal tax credit to the tune of $7,500, leading to a drop in the cost of premium electric vehicles in the U.S. But, in China, this support is lacking. The Chinese government has these local players as the focus of its green initiatives. Incentives of up to 10% sales tax exemption are meant only for locally-built vehicles or to those imported by Chinese companies to sell in the domestic market.

Foreign brands such as Tesla or BMW (BAMXY) are left out of larger incentives. However, Tesla is prepared to overcome this problem as the company plans to build a manufacturing plant in China in the next three years. As a result, Tesla is laying the groundwork for its success in China by introducing an SUV to tap a fast-growing segment, along with a plan to build a manufacturing facility in order to take advantage of the incentives.

Another factor that should help Tesla overcome pricing pressure and competition from local rivals will be the Gigafactory. Once the Gigafactory is operational, it will allow the company to manufacture 500,000 cars annually, which will lower the price of its EV's by 30%. In fact, it is believed that such mass production will bring down the price by up to 70%. Therefore, Tesla will be able to price its products such as the Model X more competitively, allowing the company to gain a greater share of the Chinese electric and SUV market.

The Model X will help the Chinese population overcome pollution problems

In the meantime, there are two factors that will help Tesla tap growth in the fast-growing Chinese SUV market - the HEPA filter-equipped Model X and Tesla's improving efficiency.

Tesla launched its Model X SUV on September 29. The vehicle is equipped with some striking luxury features such as falcon-wing doors, independently operable second-row seats, and an enormous front windshield. In addition, the Model X has a bio weapon defence system. The system is capable of creating positive pressure inside the cabin of the Model X, providing occupants a healthy environment.

It is also equipped with a medical grade High-efficiency Particulate Air (HEPA) filter. This particular feature plays a role in filtering pollution from the air outside the Model X before introducing and circulating it in the cabin.

Now, this is a smart move by Tesla since the Chinese population is suffering due to high levels of pollution. As per Berkeley Earth, over 80% of the people in China are exposed to pollution levels that are considered safe by the EPA in the U.S. The level of pollution in the air in Beijing is so high that its equivalent to smoking 40 cigarettes a day. Alarmingly, data indicates that around 4,000 people die in China everyday due to air pollution, accounting for 17% of deaths in the country.

Now, the average Chinese motorist is stuck in traffic for 9 days a year and congestion is rising day by day. This is way greater than less than 40 hours spent by an average American stuck in traffic. Since Chinese motorists are exposed to dangerous levels of pollution for longer periods while commuting, Tesla's Model X gives them just the thing that they need in order to improve life expectancy. In fact, the rampant pollution in China has provided a boost to companies selling face masks that come in different styles.

Hence, Tesla's HEPA filter and the bio-weapon defence system is a great idea incorporated in the Model X, especially when Tesla is eying China as a contributor to its total sales volume as much as the U.S. Looking ahead, I won't be surprised if Chinese authorities encourage the adoption of Tesla vehicles as they are worried about the uncontrolled air pollution taking place in major Chinese cities such as Beijing and Shanghai.

They are doing everything from putting restrictions on monthly car registrations to asking the local governments to have 30% of fleet acquisitions pooled from "new energy vehicles," or face fines. In such a scenario, the Model X should see an increase in its sales going forward, not only because it is an electric vehicle that suits the Chinese government's plans, but also because it keeps passengers in a green environment when they are inside the vehicle.

Conclusion

The Model X looks like an enticing product due to its strong features, and I won't be surprised if it performs well in China in the long run. With this model, Tesla has brought the right product to the Chinese market that will allow it to tap a fast-growing hotspot. Hence, I think that the Model X is just what Tesla needed in China and it will lead to an overall improvement in its sales performance going forward since the country accounts for almost 10% of its overall sales.

Disclosure: I/we 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.

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