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China’s Ministry of Industry and Information Technology added Tesla to a list of approved automakers, clearing the electric vehicle (EV) maker to begin production in the country, according to Reuters. Tesla is currently building a $2 billion Gigafactory near Shanghai that will begin producing vehicles by April 2020.
Tesla will be able to sell its domestically produced EVs in the country at a much lower price than those it currently imports, as it can avoid pricey import duties and shipping costs. For instance, the China-made Model 3 Standard Range Plus will reportedly cost $47,529, 13% lower than what Chinese consumers are paying to import basic Model 3s from the US.
Tesla is focused on establishing itself in China as the country is — and will continue to be — the world’s largest EV market. In 2018, China accounted for nearly 1.1 million EV sales, and with 2.3 million units, it owned almost half of the world’s EV stock, according to the International Energy Agency. China is expected to continue to be the leading market for EVs, as annual EV sales are expected to reach nearly 5.5 million units in 2025.
However, the Chinese market doesn’t come without its challenges for Tesla. The Chinese EV market is currently facing turbulence amid the country’s economic slowdown. The growth of the Chinese economy has been in a slump over the last year, and its weaker-than-expected performance will likely continue into 2020, in part due to a trade war with the US.
This extended period of slow growth could hurt Chinese car sales as consumers typically spend more cautiously, such as avoiding high-priced purchases, in periods of economic uncertainty. Unfortunately for Tesla, its obstacles in China also extend beyond the economy as it faces a slew of local competition. The Chinese EV market is incredibly crowded, with 487 registered EV-makers in the country as of last summer, per The Wall Street Journal.
Despite these challenges, we expect Tesla to succeed in China, as it will be able to lean on its strong brand presence to capture share and weather the consolidation that will likely hit the EV market.As the Chinese government slashes EV subsidies, many of the horde of EV-makers will likely fold or merge — the government cut EV subsidies by up to 60% in July 2019, and ended subsidies for EVs with ranges below 250 kilometers (155 miles).
But given that Tesla’s EVs are already selling well in the country; they will eventually have lower prices; and that the company will face a slimmer field of competition, Tesla seems to be set up to become a perennial leader in the Chinese market.
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