We knew it was bound to happen. Riding high from the popularity of the Model S, Tesla (NASDAQ: TSLA) will be entering the Chinese market after gaining a substantial amount of reserve orders from Hong Kong.
It is a great time for Tesla to capitalize off of China’s growing wealthy elite, where EVs are among top brass when it comes to showing off the latest gadgets to peers.
In Hong Kong alone, over 300 residents have placed deposits for a Model S in the range of $5,000 to $42,500, Bloomberg reports.
This is where Tesla can get its foot in the door in the Middle Kingdom.
For the long term, there is also talk of Tesla setting up a manufacturing base on Chinese soil for a cheaper and smaller Model S – something that could make Tesla more of a household name.
There are some barriers to overcome on mainland China, but the odds have been stacked against Tesla before. And there are signs of encouragement.
Take Hong Kong, for example.
Hong Kong is a semi-independent state, but the old legacy of colonialism has left a greater affinity for all things Western.
Hong Kong’s primary island is a little less than 10 miles wide, which is more than enough road elasticity for a person driving a Model S, which can run nearly 300 miles without being recharged.
Hong Kong has only 300 EVs on the road currently, but over 1,000 charging stations are situated in parking lots and shopping areas.
Hong Kong is a shoe-in. The only question is whether or not Tesla can make successful inroads into mainland China.
I believe the answer is an eventual yes.
Tesla in China
With China surpassing the U.S. as the world’s largest automobile market, it makes sense for some of the biggest auto makers to jump into the Chinese market. GM (NYSE: GM) has entered the market with its hybrid Chevy Volt, and other companies like Daimler (OTCMKTS: DDAIF) and BMW (ETR: BMW) have a firm hold on the luxury market in China.
And then there’s Tesla – a car company that’s only ten years old and only made its first real profit in the first quarter of this year.
The Model S has gained overwhelmingly positive reviews among critics, achieved record sales numbers, and garnered positive word-of-mouth internationally. This is where Tesla can blow the competition out of the water.
The progressive company has earned enough credibility to slide its way into Chinese territory.
But Tesla will be at a disadvantage, since the company only sells EVs. Although Tesla’s competitors are also selling EVs and hybrids in China, they still have gasoline car sales to fall back on.
And EVs in general are not all that popular in China. Only 12,791 were sold last year.
One reason for lackluster EV sales is the limited number of recharge stations – the entire country only has 168. The nation is so large, many fear they will run out of power before reaching a station.
But Tesla has a distinct advantage over other electric cars because of its 300 mile driving range. A person fearful of limited recharge stations would be more willing to take a chance on a Tesla, since the Model S has the best mileage of any EV on the market.
The Chinese government does have a projected goal of adding 5 million EVs to the road by 2020 – something that could translate to the construction of more charging stations if that goal is met.
But another major hurdle is the price factor.
The price of foreign cars in China is already exceedingly high due to tariffs, so a Model S would be far more expensive than the base price of $62,400 in the United States.
Tesla has yet to establish an official price for its Model S in China – mostly because of trademark issues and bureaucratic paperwork – but let’s just say it is going to be expensive, and it will be a vehicle that will only be accessible to China’s elite.
I doubt even China’s growing middle class would be able to afford a Model S in its current incarnation. While the base price of $62,400 is expensive for many in the U.S., an American could still save up and get on a lucrative payment plan with little to no money down. But with tariffs driving up prices in China, the Model S will be a car favored by upper classes.
Musk is aware of the Model S appeal among the wealthy, which is why his company plans on making the backseat more plush and comfortable for passengers in consideration of wealthy Chinese who have paid drivers.
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What This Means for Investors
You may be worried about the lack of electric vehicle sales in China, but I would not worry too much.
Overall, EVs are not doing that well in the U.S. either, but Tesla still managed to beat its heaviest competitors like GM in the sales arena.
And as far as Tesla goes, I would take a serious look at the company stock.
In the second quarter report, net income for Tesla increased 70 percent from the first quarter. There were a record number of 5,150 Model S sales in North America, exceeding the 4,000 target sales goal.
China may be a new venture, but with such high demand in Europe, Asia, and North America, the company projects an annual sales model of 40,000 units by late 2014. Orders in Europe have grown steadily since February of this year, and Tesla is expected to deliver 800 vehicles in Norway alone.
The company is also set to debut the highly anticipated Model X in 2014.
At this point, I see Tesla’s horizons in the Asian market going up. The company is already starting to plant the seeds of success in China.
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