On New Year’s Day 2023, Tesla carried out a special price adjustment – maintaining the original price. However, after the New Year, the seemingly unchanged price no longer included the Chinese government’s subsidy for new energy vehicles. This was Tesla’s most secretive price reduction, and also the first time to compensate for the subsidy since entering the Chinese market.

On January 6, Tesla China announced new prices for Model S/X, and at the same time, implemented a new round of price reductions for Model 3/Y. This time, all Tesla models on sale on the Chinese official website have reached their lowest prices in history:

• Model 3 RWD version is priced at 229,900 yuan, a decrease of 36,000 yuan;
• Model 3 Performance version is priced at 329,900 yuan, a decrease of 20,000 yuan;

• Model Y RWD version is priced at 259,900 yuan, a decrease of 29,000 yuan;
• Model Y Long-Range version is priced at 309,900 yuan, a decrease of 48,000 yuan;
• Model Y Performance version is priced at 359,900 yuan, a decrease of 20,000 yuan.

As a result, unsurprisingly, Tesla once again became the biggest topic in the auto industry. However, the discussions that made up this wave of traffic came from several directions.

Discussion 1: Why did Tesla reduce its prices?

Tesla’s price adjustments can be summarized into three stages based on the process of localization and marketization.

Import Sales Period

The first stage was before Tesla began production in China. On February 1, 2019, Tesla Model 3 was launched on the official website in China.

At that time, Model 3 was sold in China through import, with a relatively high price and no new energy policies except for the license plate. Neither the new energy subsidy nor the exemption of purchase tax were included.

During this stage, Tesla mainly used Autopilot software, financial loan preferential policies, and other methods to reduce prices in order to increase sales. The official price adjustments of imported Model 3 models were also based on the exchange rate of the US dollar and comprehensive costs.

During the import and sales period, the cheapest entry-level Model 3 was priced at 377,000 RMB, and the most expensive high-performance version was priced at 522,000 RMB. If including the purchase tax, all the on-sale Model 3’s at that time cost over 400,000 RMB, while the fully equipped models cost over 600,000 RMB.

Shanghai Factory Ramp-up Stage

The second stage is the ramp-up period after Tesla’s localization production begins. Domestic production is a very important milestone. Firstly, the cost of non-manufacturing processes such as cross-border logistics and import taxes is eliminated after the Model 3 has changed from an imported car to a “domestic car”, resulting in a significant decrease in price.

On New Year’s Day 2020, the price of domestically produced Model 3 underwent major adjustments, and after deducting the RMB 24,750 national subsidy, the price of the entry-level locally-produced Model 3 was only RMB 299,050, reducing the overall cost of the entire car from over RMB 400,000 to only RMB 300,000. In the initial stage of Model 3’s localization production, its potential consumers mainly compared it with BBA’s mid-size sedans. At that time, Tesla was labeled as a “high-performance luxury electric vehicle with high cost-effectiveness” in the market.

After the localization production, Tesla also entered a stage of scale-up expansion, not only continuously speeding up and expanding production scale on the manufacturing side but also continuously increasing the localization rate of domestic Tesla vehicle components on the supply side. These two complement each other, allowing the manufacturing cost of domestic Tesla to enter a rapidly declining stage.

The most representative example was on China’s National Day in 2020 when the standard Model 3 with a NCM battery pack made by CATL went online, priced at RMB 249,900. It was also in October of that year that the Shanghai factory produced Model 3 for the first time for export to Europe. Since then, the Shanghai factory has not only been responsible for domestic market production but also undertaken a portion of global market production, exporting to regions including but not limited to Europe, the Middle East, and the Asia-Pacific.

On New Year’s Day 2021, the domestically produced Tesla Model Y went online on the official website of China, and Tesla entered the dual-model sales phase in the Chinese market.

On July 8th of the same year, the domestically produced Model Y standard range version priced at 276,000 RMB went on sale and unsurprisingly became the best-selling model in the Chinese market, with sales hitting record highs. It was also during this period that Tesla began to gradually move away from the “cost-effectiveness” label.

However, external global market factors, such as the pandemic, chip shortages, and rising raw material prices, were also reflected in Tesla’s car prices. From 2021, Tesla “went against the norm” and entered a price increase cycle. At the highest point, the prices of all Model 3/Y vehicles were more than 40,000 RMB higher than their early historical lowest prices. As a result, Tesla began to gradually move away from the “cost-effectiveness” label.### Overcapacity Stage

On the market side, in the price range where Tesla is positioned, there are many more choices for domestic new energy vehicles compared to the past two years. More importantly, these models have more advantages than Tesla in terms of configuration and cost-effectiveness, and consumers who pursue cost-effectiveness and practicality are gradually being diverted to domestic new energy vehicles.

The Chinese new energy market has rapidly grown between 2020 and 2022, during which the new mainstream manufacturers and consumer groups gradually formed in this market. Ultimately, this market is almost significantly different from the domestic fuel vehicle market in various aspects. Under intense competition, cost-effectiveness has become a concern for all brands and consumers in the new energy market. Under the long-term impact of this trend, the concept of luxury brands in the Chinese new energy market has been significantly weakened.

During this period, on the one hand, Tesla has gradually moved away from the user pool in this price range after a long period of departure from the product price range of BBA due to price reduction. On the other hand, it has been constantly compared with domestic new energy vehicles by consumers in terms of cost-effectiveness related to configuration due to the sharp increase in sales, and Model 3/Y has rapidly become a “street car” in first-tier cities. Chinese-made Tesla quickly opened the market with cost-effectiveness, but in the process of forming and continuously strengthening for several years, this label gradually blurred the impression of Tesla as a luxury brand in China.

After 2021, Tesla, which has been “continuously raising prices,” gradually lost its most important cost-effectiveness label, while more cost-effective models than Tesla continued to emerge. With the monthly capacity of the Shanghai factory reaching 100,000 units, Tesla’s production capacity has gradually exceeded demand. As a result, Tesla, which operates a direct sales system, cannot keep inventories for dealers like traditional automakers, so it chooses to temporarily balance supply and demand by reducing production.

If Tesla wants to achieve greater sales, it actually has many choices. In addition to price reductions, it can also increase the configuration of existing models, launch redesigned models, or expand its product line by introducing new cars.

In the end, Tesla chose the simplest and fastest way in terms of short-term effectiveness, which is to reduce prices. And one of the core factors that enables Tesla to do this is that there is enough room for price reduction in Tesla’s gross profit margin.

During the production ramp-up phase, while Tesla kept reducing prices, the gross margin of each car continued to break the automotive industry’s understanding. In 2022Q1, Tesla’s gross margin per car reached as high as 32.9\%, and in the recent Q3 2022 financial report, it was 27.9\%.

Markdown Translation

For the current domestic Tesla, the gross profit is still far from the warning line. At this time, idle production capacity is not worth the loss. Therefore, the current price reduction is Tesla’s “price for quantity” consideration under the maximization of benefits.

In terms of the economic background, the domestic epidemic situation is gradually being released, and the price of battery raw materials has also entered a downward phase. At this time, Tesla’s advance volume effect on gross profit will not last too long. Therefore, it is also a reasonable move.

The second hot topic after Tesla’s price reduction is the normalization of car owners’ rights protection.

Discussion 2: Normalization of Car Owners’ Rights Protection

Why do you still protect your rights if you know there is no compensation?

As expected, after the price reduction, Tesla owners from all regions gathered to protect their rights, becoming the second wave of hot news after the price reduction.

In recent years, Tesla’s rights protection incidents have occurred frequently, but every time it only happens after a price reduction. As netizens say, they have never seen Tesla owners gather at the store to demand compensation for the price difference after a price increase.

In fact, this phenomenon is easy to explain. Users are only dissatisfied when their interests are damaged. Under the direct sales system, every price reduction of Tesla means that users who buy at a higher price have suffered losses, and they were completely unaware of this in advance.

In the Chinese auto market, Tesla has set a precedent for irregular, unnotified, and uncompensated public price reductions.

However, in Tesla’s values, the cost of the product will continue to fluctuate with various factors, and corresponding price adjustments will be made while maintaining a reasonable gross profit. Whether it is a price increase or a price reduction, it is a fair way of Tesla.

In this matter, Tesla obviously ignored the users’ feelings.

Although Tesla has never compensated any “rights-protected car owners” after each price reduction or rights protection, there are still many car owners who go to the store for rights protection after each reduction. Because even if this matter cannot get any substantial compensation, expressing their dissatisfaction to Tesla is the greatest value of “rights protection” and the way for an ordinary person to sting the cost minimum and risk minimum of Tesla.

As the saying goes, family ugliness cannot be made public. In the end, every time “rights protection” occurs, the outside world not only laughs at Tesla but also laughs at Tesla users. Those Tesla owners who did not participate in rights protection were also affected, resulting in a “double loss” outcome for both Tesla’s brand and its users.

However, people’s emotions are driven by direct interests and are irrational. Once the matter has started, there will constantly be the next time.### Will Tesla Change Because of This?

Although Tesla has never backed down due to “rights protection”, it is clear that Tesla does not want “rights protection” incidents to keep occurring.

Tesla’s measures are very “first principle”, publicly announcing the logic behind their price adjustments to the public: adjustment is based on actual cost fluctuations, when costs are low, they decrease the price, when costs are high, they increase the price.

This logic sounds very reasonable, but the problem is that the “costs” mentioned by Tesla have always been opaque to users. As consumers, if they want to study cost fluctuations in the car industry, there are barriers to entry and costs.

So essentially, this measure has not solved the actual problems of users. However, other than that, Tesla has not taken any other measures.

Looking at it the other way around, if Tesla insists on the “cost-based pricing” strategy, such contradictions will continue to exist. And according to Tesla’s style, compensating users with price reductions will not happen either.

Ultimately, there are several ways to alleviate contradictions, one is to reduce cost fluctuations, and the other is for Tesla to maintain production and sales balance. But in the Chinese market, the competitive characteristics of the new energy market determine that consumers’ demands for new energy vehicles will continue to increase, and the instability of market demand will be an important factor affecting Tesla’s sales.

However, ultimately, there is a long-term principle that applies, namely that a large price reduction of Tesla can bring significant sales growth. So as long as Tesla can control costs well and take the initiative in reducing prices, even if “price reduction rights protection” becomes the norm, Tesla still holds the initiative in maintaining its own production and sales balance.

Discussion 3: Changes in Market Competition

When Tesla Decreases Prices, Everyone Gets Nervous

After Tesla’s price reduction, my friend and I discussed the market impact as usual. During this discussion, we reviewed the market changes over the past few years, and finally reached this conclusion: Several years ago, Tesla was the choice of geeky early adopters and represented the most forward-looking product in the new energy market. However, in today’s new energy market, Tesla is the choice of conservatives, and with huge market sales, it has become a mass consumer product. Therefore, the impact of Tesla’s price reductions has now been extended to the mass consumer market.

After this Model 3/Y price reduction, most of the new energy vehicle models in its price range were significantly impacted, including several typical ones such as XPeng P7, XPeng G9, Zeekr001, BYD Dolphin, and Smart Elf No. 1. Many potential customers for these models will flow to Tesla after this price reduction. Only products with large enough differences in product differentiation or price range intervals can be less impacted by this price reduction.The most direct way to reduce customer loss in the face of Tesla’s “price-cut frenzy” is to follow suit with a price cut. However, for some domestic new energy vehicles that have already been competing with Tesla with low-profit strategies, the 30,000 yuan price cut is a hard stroke that can even cause losses in some cases, making it impossible to follow suit.

If Tesla’s price cut is a trade-off between price and quantity, then many domestic new energy vehicles have already traded profits for market share since the release stage. For these companies, although Tesla’s price cut has a huge impact on sales, they are powerless.

So now let’s take a look at the two main threads of Tesla’s sales changes for the past six months.

Treat others in the way that you want to be treated

The direct reason for Tesla’s sales decline some time ago was that many new energy vehicle models that were more cost-effective appeared at the same price level. Additionally, the growth of our new energy market has slowed down due to the epidemic and economic reasons. As a result, Tesla’s users have been diverted to other vehicle types.

However, the dark side behind this direct reason is that many manufacturers have overdrawn their profit margins in advance to gain a foothold in the market competition. Tesla has high cost-effectiveness, so I will have even higher cost-effectiveness than Tesla. This is the “treat others in the way that you want to be treated” competition between competitors and Tesla.

However, relying on extreme cost control, Tesla’s prices are already competitive under the premise of high profit margins. These vehicle types that try to divert potential customers from Tesla through cost-effectiveness strategies are not far behind Tesla in terms of scale and have no ability to surpass Tesla in cost control. However, in the highly competitive Chinese new energy market, the urgency and importance of opening up initial market share and brand recognition are far more significant than product profitability. As a result, many manufacturers have to choose a low-price strategy to gain a foothold in the first stage.

But in this low-price strategy, Tesla’s operational space is the largest. Therefore, when Tesla’s sales are sufficiently affected, the “treat others in the way you want to be treated” competition between Tesla and other domestic new energy vehicles is implemented through price reduction.

In the end, Tesla is the instigator of all this, but the domestic new energy companies’ price war has accelerated Tesla’s price cut, further squeezing their market survival space in return.

This is currently the situation in the Chinese new energy market. The prosperity of the new energy manufacturing industry has reduced the barriers to entry into the new energy market, but while the barriers are getting lower, the gap between different companies is huge. Ultimately, everyone is squeezed into the seemingly largest price segment in the market.When there is a large disparity of strength, there are always some people who will take the wrong path, but the few who can succeed under risk strategy are still a minority. Fighting against Tesla by using the “duizi” approach may achieve short-term benefits, but it is difficult to win in the long run.

Tesla’s price reduction is indeed a high-risk action in terms of user operation, but considering Tesla’s current status and the benefits that can be obtained from the price reduction, such a cost is acceptable.

Conclusion

Some people say “Tesla’s competitiveness in China is not good”, but in my opinion, this is a misunderstanding of Tesla and the competition of domestic new energy markets.

Firstly, from 2019 to 2022, Tesla only relied on two models introduced into China to surpass BBA and become the best-selling luxury brand, achieving unprecedented efficiency and results.

In addition, although Model 3/Y is a relatively old product, and even in 2023, there are few products with the same price that can surpass these two models in terms of key product points that affect consumers’ car purchase decisions, and there are even fewer new cars that are inferior to these two models.

In the increasingly competitive Chinese market, Model 3/Y, as a “tree” product, is being diverted by competitors, but price is the dominant factor, and the cost behind the price has always been Tesla’s most difficult-to-replicate and surpass competitiveness.

The cabin and assisted driving experience are not the main reasons why Tesla sells well, nor are they the main reasons why consumers choose other products instead of Tesla. Although the importance of these two factors is increasing day by day, in consumers’ current car purchase decisions, they are still auxiliary factors. When the industry truly comes to the point where sales are supported by these two factors, Tesla’s technological R&D strength is fully capable of achieving the industry’s top level.

At present, Tesla has been surpassed by some domestic new energy companies in many segmentation projects, but the reason why Tesla seems to perform more slowly in the Chinese market compared to some friendly competitors is because Tesla’s development stage is not at the same level as theirs, and these issues are not the highest priority for Tesla.

Tesla can easily add seat ventilation, electric suction doors, electric sunshades, or air suspension to Model 3/Y, and then improve NVH. However, at present, the problem of sales can be solved through price reduction. Once the configuration is changed, corresponding tests and verifications are required in the global market, which will cost time and money, and the cost of factory transformation may be even greater for Tesla. Moreover, outside the Chinese market, Tesla has no apparent shortage of demand, so leaving these more costly improvements until the next generation or model change is in line with Tesla’s consistent practice.Only by understanding these, can we comprehend why Tesla is not eager to produce new cars in 2022, but rather expands global production capacity as its top priority.

Returning to the topic of the Chinese market, Model S/X has returned after a two-year hiatus. During the two years in which Tesla was absent, no product successfully replaced Model S/X in the market, nor did any product open up new markets. Therefore, the million-level new energy vehicle market in China did not take shape in the past two years.

The returned S/X will start delivery from the second quarter of this year. These two cars will verify the single vehicle capacity of China’s million-level new energy vehicle market, and also verify how much residual value Tesla’s luxury brand has in China. Under such a two-tiered product distribution, it remains to be seen whether Tesla can balance high-end luxury with the value of some cost-effective consumer goods, or whether it will go the other way. This will be something to watch in 2023.

This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.