Tesla first to hike prices in China
Unclear if costlier cars will discourage wealthy buyers
US carmaker Tesla is likely to be affected in both its sales in China and its planned factory in Shanghai amid the China-US trade row, experts said, while it will be almost impossible for Chief Executive Elon Musk to reverse the situation during his China visit.
Tesla hiked prices on its Model X and S cars by about 20 percent in China, becoming the first automaker to raise prices in the world’s largest automotive market in response to a US-China trade row.
The move is the first indication of how higher Chinese tariffs on certain US imports will carry over to showroom floors, with other automakers likely to follow suit or shift a greater portion of production to China.
“It’s only chapter one of this story,” said James Chao, a Shanghai-based analyst at consultancy IHS Markit, who anticipates that more companies from around the world will be affected by the trade skirmish.
China slapped retaliatory tariffs on US car imports in response to moves by the US to impose tariffs on $34 billion worth of Chinese goods.
China’s tariffs are expected to affect automakers as well as companies that make industrial components in the US, and those that produce soybeans, whisky and other agricultural produce.
Prices matter
For Tesla especially, which is rapidly burning cash and struggling to turn a profit, China is key. Sales in the country accounted for about 17 percent of its revenue last year.
“Raising the prices is going to hurt sales, but money-losing Tesla has to raise prices because they can’t afford to fully absorb the higher costs of the tariffs,” CFRA research analyst Efraim Levy said.
“Considering they claim to be capacity-constrained, they should be able to shift sales elsewhere.”
In May it slashed up to $14,000 off its Model X in China after China announced major tariff cuts for imported automobiles, but the new tariffs have now erased that.
A basic Model S sedan now costs about 849,900 yuan ($128,779), up from 710,579 yuan in May, while a Model X sport-utility vehicle costs about 927,200 yuan now, versus 775,579 yuan in May, according to its website.
Analysts were divided on how much the price increases will bother Tesla’s affluent buyers.
“Tesla consumers are a unique group of rich people. They want more of a brand image and product experience, and price is less of a concern for them,” said Yale Zhang, head of Shanghai-based consultancy Automotive Foresight, who believes rich Chinese consumers will keep buying Teslas despite the price hikes.
IHS Markit’s Chao, however, said many wealthy buyers in China are becoming more price conscious and want to get a good deal.
Mei Songlin, vice president and managing director of China operations at JD Power, echoed Chao’s opinion, saying even though some rich people want to try new products like Tesla, they still care about price.
For most other US carmakers, including Ford and General Motors, sales may not be affected by the evolving trade row between China and the US, as they have transferred some of their production lines to China, said Zhang.
German luxury automaker BMW, which also makes cars in the US to sell in China, has also indicated that it will raise prices on vehicles it makes in Spartanburg, South Carolina.
It said on July 6 that it was unable to “completely absorb” the new tariffs.
Daimler AG, another German automaker which imports US-produced cars into China, said in a statement last week that it “aims to maintain a competitive position” in China.
New Tesla plant
Tesla’s price increases come as the company plans to build a factory in Shanghai to serve the Chinese market.
Tesla on Tuesday signed agreements with Shanghai authorities that will allow it to open a plant in the Chinese city with an annual capacity of 500,000 cars.
The company signed agreements with the Shanghai municipal government, Shanghai Lingang Area Devel- opment Administration and Lingang Group. The company ships more than 15,000 cars a year to China.
Musk was in Shanghai Tuesday, and the Shanghai government in a statement said it welcomed Tesla’s move to invest not only in a new factory in the city, a center of the Chinese auto industry, but in R&D, as well.
Zhang told the Global Times Tuesday that Musk’s Shanghai visit is related to the factory, which can solve Tesla’s problem of insufficient production capacity.
“For Tesla, the most urgent thing is to raise enough money by finding investors to support its future capacity,” Zhang said.
Construction on the factory could be months away as the company has yet to even purchase land, according to a report on financial news website caijing.com on Tuesday. Tesla won’t produce battery cells at the Shanghai factory, the report said.
Mei told the Global Times Tuesday that even if the Shanghai factory is put into operation, the key car components still need to be imported from the US, which means it cannot avoid the tariffs.
Mei guessed that Musk’s Beijing visit is related to tariffs, but “it is very hard to predict the result because almost no single enterprise can make an exception on tariffs at the country level.”