Tesla’s sales growth in China has stagnated in 2024. Despite an increase in sales during the third quarter, Tesla’s market share in the new energy vehicle (NEV) market – which includes plug-in hybrids and hydrogen fuel cell cars alongside pure electric vehicles – has dropped to 6.5% in the first seven months of this year, down from nearly 9% a year earlier.
According to Tesla CEO Elon Musk, the automaker is performing well in China with its Shanghai factory operating at maximum capacity. However, the drop in market share is a warning sign. Tesla must proactively develop and deploy innovative product designs and after-sales service strategies to ensure this decline is temporary
China Dream: A Historical Perspective
When China opened its doors to global trade in 1978, foreign firms offshored their operations to leverage China’s low-cost and efficient supply chain. After joining the World Trade Organization in 2001, China became a hub for foreign firms to produce and sell their products. In the automotive industry, Volkswagen (VW) established a joint venture with SAIC in 1984 to produce and sell cars in China, followed by GM in 1997.
Being the first two foreign car manufacturers to enter China, VW and GM leveraged their first-mover advantage, reputation, and quality to boost sales. By 2017, VW sold over 3 million cars and GM’s sales peaked at over 4 million vehicles.
To attract more foreign investment and advanced technology, Tesla opened its Shanghai factory in 2019 as the first wholly foreign-owned car manufacturing plant in China, producing Model 3 and Model Y vehicles. As the world’s leading EV manufacturer, Tesla experienced consistent sales increases since 2019.
Despite early success, two major forces have caused sales of foreign car manufacturers, except Tesla, to decline since 2017.
China’s NEV Development
Recognizing its late start in developing internal combustion engine vehicles, China has implemented extensive industrial policies, offering tax breaks and other incentives to foster the growth of new energy sectors such as electric vehicles (EVs) and plug-in hybrids (PHEVs). Since the early 2000s, the Chinese government has awarded procurement contracts to purchase EVs for public transit as part of its green development initiatives. These contracts have helped domestic EV makers, such as BYD, stay afloat and rapidly improve. Between 2016 and 2022, China’s central government spent around $57 billion to support Chinese consumers purchasing EVs. In 2022, China accounted for 62% of global EV production, including those of Western manufacturers such as Tesla operating in China.
Market Shift, Price War
As China’s post-pandemic economic growth has been slower than expected, Chinese consumers have tightened their expenses and shifted towards purchasing EVs, taking advantage of government incentives. Sales of combustion engine cars have plummeted, with only 27% of new cars sold in June being powered by conventional fuels.
In the NEV market in China, BYD captured 35% of the market in 2023, while Tesla held a 7.8% share, and NIO was a distant third with 2.1%. With over 120 brands of EVs competing for market share, the EV market in China is fiercely competitive. In 2024, BYD’s cheapest EV, the Seagull, was sold for under $10,000, putting pressure on foreign manufacturers like GM and Tesla to keep up with rapid innovation and cost reductions. GM CEO Mary Barra has expressed concerns that this cutthroat competition is unsustainable for EV manufacturers like GM.
Both GM and VW are struggling to stay afloat in China due to their slow development of EVs. As a pure EV manufacturer, Tesla must take proactive measures to avoid a similar decline, despite its current sales growth in China.
Strategies for Tesla to Compete in China
- Product Design: Tesla should reconsider its minimalistic design by introducing more physical buttons for the Chinese market. While Tesla’s futuristic and modern design is appealing, many Chinese drivers prefer physical buttons for their ease of use, reliability in extreme weather conditions, and safety, as they require less attention and can be operated more intuitively, especially in emergencies.
- Advanced Infotainment Systems: Tesla needs to leverage AI to develop advanced EV infotainment systems that offer differentiating value. Beyond navigation, charger planning, and music streaming, seamless integration with smartphones, apps, and voice control services is essential.
- Autonomous Driving Technologies: As Chinese drivers are more willing than Americans to trust autonomous driving, Tesla should launch advanced autonomous driving technologies to compete with NIO, which offers features like lane-keeping assist and self-parking. Additionally, Tesla should incorporate smart sensors to monitor driver fatigue and alcohol levels to enhance safe driving.
- Product Variety: Tesla needs to launch new EV models beyond the Model 3 and Model Y in China. Since 2019, Tesla has not released any new models, while other carmakers are introducing over 100 new models in China in 2024. Although Tesla plans to produce a six-seat variant of its Model Y in China by late 2025, this could be a tough sell when BYD is offering over 30 models, including both plug-in hybrids (PHEVs) and battery electric vehicles (EVs), across various segments such as sedans and SUVs.
- After-Sales Services: Tesla should expand its after-sales services to better engage its customers. While Tesla’s zero-interest loans of up to five years in April were well-received by Chinese buyers, the company should explore ways to expand its insurance services in China by offering lower premiums to good drivers. Tesla can use real-time driving data to evaluate and track a driver’s behavior each month, determining the next month’s premium based on this data. This strategy can be a win-win: drivers pay lower premiums for good driving behavior, and firms face fewer accident insurance claims. Additionally, Tesla could leverage sensors to schedule preventive maintenance and repair services and offer trade-in or upgrade suggestions.
While the EV market competition is fierce in China, Tesla’s global brand image in the EV market is second to none. With a projected 80 million people representing China’s middle and upper classes by 2030, there is ample room for Tesla to succeed. However, to sustain its lead, quick and decisive action is necessary.
