Tesla may reduce price of Model 3 cars built in China

Tesla Inc. is considering cutting the price of its China-built Model 3 sedans by 20% or more next year, people familiar with the matter said, betting the move will lure buyers as the world’s biggest electric-vehicle market slows.

Tesla aims to lower costs by using more local components, allowing it to import fewer parts and avoid tariffs, said the people, who asked not to be identified discussing internal deliberations. Prices of the cars, which will be built in a new factory near Shanghai and start at 355,800 yuan ($50,800), will probably be lowered in the second half of 2020, they said.

Chief Executive Elon Musk is counting on the multibillion-dollar Shanghai plant — Tesla’s first factory outside the U.S. — to give it an edge over the likes of BMW and Daimler, which are also targeting China with new EV models. Price cuts would also pressure local incumbents such as Nio Inc. and Xpeng Motors to follow suit.

“People shop on price — this will help grow the market share of electric vehicles,” said Bill Russo, founder of Shanghai-based consulting firm Automobility Ltd. “This will also force the competing products to make adjustments.”

Tesla shares climbed 3.7% to $393.15 on Wednesday, surpassing highs reached when Musk sent his infamous August 2018 tweets about taking the company private. The stock has surged more than 50% since the carmaker reported a surprise third-quarter profit Oct. 23.

A 20% price cut would drop the starting price of the Model 3 below $42,860. Xpeng said last month its new P7 sedan will cost $38,580 to $52,870.

Nio’s ES6 sport utility vehicle, its cheapest model, starts at $51,151.

Competition is heating up as EV makers struggle through an unprecedented slump in China’s broader auto market.

Sales of electric cars have fallen for months after the government scaled back subsidies.

While the potential price cut shows Tesla is cognizant of the competition, the move could also affect the company’s initial sales as customers hold out for the lower prices, Russo said. Musk has predicted Tesla will make at least 1,000 cars a week in Shanghai by the end of the year — a volume the company’s original factory in California spent months trying to hit — and has said a weekly rate of 3,000 is a target at some point.

A Tesla representative in China declined to comment.

Much of the cost cuts will hinge on batteries, which are typically the most costly part of an electric car. Tesla currently relies entirely on Japan’s Panasonic Corp. for batteries but that’s changing as it agreed to buy batteries from an LG Chem Ltd. factory northwest of Shanghai, people familiar with the matter said in August. Tesla also struck a pact to use batteries from China’s Contemporary Amperex Technology Co. by as early as next year, the sources said.