According to Chinese media, Tesla's (NASDAQ:TSLA) models X and S have been given special license plates that are designated for electric cars in Beijing, per the city's Commission for Economy and Information Technology. This is timely given that the Model X has just started to sell in China over the past week and given that SUVs remain the growth segment in China I believe TSLA is well-positioned for. I see several tailwinds for TSLA in China in the next several months.
First, the demand for SUV remains robust with growth at 36% in May, and the SUV segment continues to take market share away from sedans. Second, pricing for the Model X appears to be reasonable and competitive against the other premium segments relative to the values the buyers are getting (ie. all electric, efficiency, technology, performance etc).
However, there are also certain risks associated with TSLA in China as the country still needs to expand its network of charging stations and that it appears other premium brands have been ramping up on discounts to compete against the potential new entry by TSLA. In the long-run, I remain bullish on the company's prospects in the country, but I caution that the recent move by Musk on SolarCity (SCTY) raises questions on his management capability and his vision of the firm. This will remain an overhang on the stock.
The overall macro tailwind certainly favors TSLA as the SUV segment takes additional market share away from sedans. I note that China's May vehicle sales showed a +36% y/y growth in SUVs during the month, relative to sedan's +1.6% y/y growth. This trend has been consistent over the past several years as Chinese buyers have a preference toward SUV's size and load capacity. As a result, sedan pricing has been under pressure and I do not expect a near-term rebound in sedan's pricing environment as first-time buyers continue to migrate toward the SUV segment.
Within the SUV segment, competition among the domestic brands is fierce with brands competing on price rather than quality. Great Wall Motors is the only standout SUV brand in the mass-market segment, followed by Volkswagen (OTCPK:VLKAY) and the Japanese brands. Audi and Ford (NYSE:F) are the only non-Asian brands in this segment. In the premium segment where TSLA competes, pricing has been rational, but I note that brands such as Mercedes, Audi and Jaguar have begun to offer aggressive incentives to generate sales. I note that MB delivery was up +41% in May driven by SUV sales while Audi saw sales +5% driven by sales of its Q5 SUV. BMW (BAMXY) has been relying on its X1 models while Jaguar has been the most aggressive on discounting its models. TSLA's Model X is priced at Rmb960k - Rmb 1.5m, roughly $144k-$220k USD. The low-end of spectrum is comparable to that of a BMW X5 or a Mercedes GL-class which continue to draw traction amongst the high-income earners, so I certainly see the Model X to be competitive in this front.
Although I am positive on TSLA's prospects in China, the underdeveloped charging networks remain a concern. Currently the company only has 404 "super chargers" in 96 stations along with 1.3k charging posts covering Beijing, Tianjin, Hebei, Shanghai, Jiangsu, Zhejiang, Guangzhou and Shenzhen. The number of charging posts covering an area equivalent to half of the US is not sufficient in my view and the company is planning on an aggressive expansion in those regions in the coming years.
In April, TSLA partnered with the China Quality Certification Center to allow TSLA owners to charge at CQCC-authenticated charging locations. So far, Beijing Huashang Sanyou New Energy Tech, a small SOE that specializes in charging posts, has been certified by CQCC, with another firm located in the neighboring Shandong province. There are also talks of creating a national standard on charging stations that allows models from different OEMs to use the same charging post. The standard has been issued but execution remains a challenge due to different stakeholders. A risk to TSLA in China could be altering its models to accommodate the local standard.
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