Will Hong Kong Return As Tesla's Beacon City? (NASDAQ:TSLA)

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Summary

Hong Kong used to be one of Tesla's premier markets.
Sales collapsed due to the withdrawal of subsidies.
Now smaller subsidies are back - will this be enough for Tesla to regain former glory?

In 2016 Tesla (NASDAQ:TSLA) sold about 6,000 Model S & X vehicles in Hong Kong (population 8 million), more than in the UK (60 million), Canada (35 million) and Australia (24 million) combined. That was more than 7% of Tesla's production, and, coincidentally, about 7% of HK's entire car market. Elon Musk declared that Hong Kong was a "beacon city" for EV adoption. In the first quarter of 2017, things got even better - 3,700 cars registered. Then it stopped. In the final 3 quarters of 2017, Tesla sold 32 cars in Hong Kong. Not 3,200. 32. Despite desperate discounting as described here, and innovative promotions/discounts, as shown here.

The reason was simple - from April 1, 2017, the HK government ceased to exempt electric vehicles from the First Registration Tax (FRT) - a tax that can more than double the price of new vehicles in Hong Kong, and which is designed to tax more expensive vehicles more heavily than cheaper vehicles.

(Source: HK Transportation Department)

Because of the tiered rate, under the full exemption regime, luxury EVs were proportionately more advantaged over their ICE peers than were mass market EVs.

EVs still benefit from a capped FRT reduction of HK$97,500 (US$12,500) until March 31, 2018, but even in Hong Kong's environment of high gasoline taxes & prices (US$7.7 per gallon), that was not sufficient to make EVs competitive. Tesla went from viewing Hong Kong as a "beacon city" to threatening to cutback or pull out. As a "source close to" Tesla put it to the South China Morning Post, “Without government support, who is willing to invest in green technology?”

Now the HK government has changed course again. As announced today, the government intends to (i) continue the current, ineffective, HK$97,500 (US$12,500) reduction, and (ii) offer a reduction of HK$250,000 (US$32,050) subject to the new owner's scrapping of a previously owned vehicle, which must be at least 6 years old, and which must have been owned by the scrapper for at least 3 years.

So, will this make a sufficient difference for potential Tesla buyers? In March 2017, the HK Electric Vehicle Association ("HKEVA"), an industry supported charity, analyzed the results of the subsidy reduction described above. Although the government had said that the intention of the subsidy reduction was to support the purchase of electric vehicles priced up to HK$400,000 (US$51,280), the HKEVA was skeptical that the subsidy was sufficient. Since only 99 total EVs were registered in HK in the 9 months following the reduction (as opposed to 3,700 for Tesla alone in the previous quarter, it seems that they were correct. In the detailed section of their analysis, they showed that all of the eleven EVs then sold in HK would still pay substantial FRT:

	EV	Base Price	FRT	Total
Mitsubishi (OTCPK:MMTOF)	iMiev	HK$298,800	HK$74,100	HK$372,900
Nissan (OTCPK:NSANY)	Leaf	HK$343,800	HK$118,800	HK$462,600
Nissan	Leaf Plus	HK$359,800	HK$134,800	HK$494,600
Nissan	E-NV200	HK$439,800	HK$214,800	HK$654,600
Renault (OTCPK:RNLSY)	Zoe	HK$296,600	HK$72,450	HK$369,050
Renault	Fluence ZE	HK$349,800	HK$124,800	HK$474,600
BYD (OTCPK:BYDDF)	e6	HK$330,000	HK$105,000	HK$435,000
Volkswagen (VLKAY)	eGolf	HK$369,880	HK$79,120	HK$449,000
BMW (OTCPK:BMWYY)	i3	HK$451,000	HK$226,000	HK$677,000
Tesla	Model S	HK$582,100	HK$369,415	HK$951,515
Tesla	Model X	HK$707,700	HK$513,855	HK$1,221,555

(Source HKEVA & Author)

So what happens if we apply the new subsidy regime to the same data?

	EV	Base Price	FRT	Total
Mitsubishi	iMiev	HK$298,800	HK$0	HK$298,800
Nissan	Leaf	HK$343,800	HK$0	HK$343,800
Nissan	Leaf Plus	HK$359,800	HK$0	HK$359,800
Nissan	E-NV200	HK$439,800	HK$62,300	HK$502,100
Renault	Zoe	HK$296,600	HK$0	HK$296,600
Renault	Fluence ZE	HK$349,800	HK$0	HK$349,800
BYD	e6	HK$330,000	HK$0	HK$330,000
Volkswagen	eGolf	HK$369,880	HK$0	HK$449,000
BMW	i3	HK$451,000	HK$73,500	HK$524,500
Tesla	Model S	HK$582,100	HK$216,915	HK$799,015
Tesla	Model X	HK$707,700	HK$361,355	HK$1,069,055

(Source HKEVA & Author)

So it appears that while the great majority of EVs in HK will now escape FRT, Tesla Model S & X will not. What is the reason for this?

A government source briefing today, pointed out that four of the six carmakers selling EVs in HK offer models that would benefit from a full EV exemption. He further said that “The government feels that the purchase of high-end models should be not subsidised by taxpayers’ money, especially when more mass market EVs have become available on the market over the past years,”. Tesla is not one of the four. This change to the subsidy regime seems unlikely to restore Tesla to the dominant EV position it once held in Hong Kong.

It is worth noting that if and when the RHD Model 3 becomes available (expected 2019), a US$60,000 variant will not be exempt from FRT. If a US$35,000 were ever to be produced, it would be.

Asked for Tesla's view on the changes, a Tesla spokesman had no comment.

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This article was written by

Tokyo Picker

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The opinions expressed herein are the opinions of Teton Record Services Limited Company. Publication of these opinions is not a recommendation for investment, nor is it a solicitation of any kind of business or transaction.The employee authoring this opinion has thirty years in investment banking, specializing in tax arbitrage and asset finance, and has a Masters degree in politics and economics from Oxford University.Teton Record Services Limited Company is a corporation established with limited liability under the laws of the State of Wyoming.

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