Will Tesla’s China Story Lose Its Charge?

Nina Xiang, Contributor
3/18/2014 @ 2:10PM |2,163 views
Will Tesla’s China Story Lose Its Charge?
When 35-year-old Eric Zhu deliberated to which car his family should buy, Tesla Motors didn’t stay long in the race.
Zhu, who works as a senior manager at a Western industrial firm in Beijing, is drawn by Tesla’s 100% electric power and zero emissions promise. As a father of a two-year-old boy, Zhu is willing to compromise a lot for the sake of clean air.

“But owning a Tesla right now in China is just too impractical,” he sighs. “We need a car that can take us back to our hometown on muddy roads, or go on a road trip to Tibet. This is Beijing. It’s not like we can own two cars.”
To win over Chinese consumers like the Zhu family, the Palo Alto, California-based Tesla Motors needs to succeed where other innovative American tech companies have failed.
Google Inc., for example, exited the Chinese market after four years’ of operation. Facebook and Twitter are blocked from entering the market. Apple Inc. is still waiting for China sales to meet hefty expectations after it struck a deal with China Mobile last December.
There is little evidence that Tesla will be the exception.
Tesla is scheduled to deliver its ultra-modern electric vehicles to Chinese consumers next month. But there is practically no recharge infrastructure, and no policy support for Tesla in China. Both will take time to tackle. Not to mention the fierce competition in the world’s largest automobile market.
The company’s stock has doubled in the past four months, largely due to projected demand from China. But billionaire co-founder and chief executive Elon Musk, as well as investors, may soon realize that the Chinese market is much harder to navigate than they think.
“They are assuming the Chinese consumers behave the same way American consumers do. Chinese consumers are environmentally conscious, but they are also very pragmatic,” says Jack Perkowski, founder and managing partner at JFP Holdings.
Perkowski previously founded ASIMCO, one of the largest auto components companies in China.
Beijing To Shijiazhuang: Mission Impossible?
Musk has projected that sales of its electric Model S cars in the Chinese markets should match U.S. levels, which totaled 22,450 in 2013, as early as 2015.
It is an ambitious projection. Porsche, for example, sold 37,425 cars in China last year. But that is 10 years after it sold its first Porsche Cayenne in the country.
The more mind-blowing aspect of that projection is how little infrastructure and services Tesla provides in China.
Currently, Tesla drivers in the U.S. have three ways to recharge their EVs. One is a high power wall connector that can be installed inside owners’ garages. This adds electricity to drive 58 miles per hour of charge with a twin chargers installed.
The second method is a mobile connector, which can be plugged into any electricity outlet. This adds 28 miles of drive per hour.

The last option is at one of Tesla’s supercharger stations, where 30 minutes will add enough electricity to drive around 170 miles. All for free.
There are currently 79 Tesla supercharger stations in North America. The company has plans to build a lot more to cover 80% of the U.S. population by 2014, and 98% by 2015.
For Chinese consumers, there is only one way to recharge: the high power wall connector.
This means Tesla drivers in China are limited to a circle of less than 150 miles in radius with their home as the center. For someone who lives in Beijing and needs to drive to Shijiazhuang, the capital of Hebei province that is 170 miles away, Tesla will fail the task. Not to mention if the car runs at a higher speed, its distance per charge will drop further.
Moreover, it is extremely difficult for Chinese consumers to install Tesla’s high power wall connector in their garages. Except a tiny portion who can afford to live in luxury villas with their own garages, almost all of the Chinese urban population live in apartment buildings, where cars are parked in a large parking lot.
To install a recharge pole requires months of negotiations, obtaining numerous permissions and dealing with bureaucracies. One EV owner, who asked to remain anonymous, was able to install a recharging pole (not for a Tesla) next to his parking spot in a large residential community in Eastern Beijing. But it took over six months of painstaking time.
Tesla currently does not provide any support or assistance for customers to install recharging poles. Tesla’s China press office did not respond to requests for comments.
“The initial fad factor will be very high, but over time the expense and inconvenience will be a challenge,” says Gary Rieschel, founding managing partner at Qiming Ventures, a Shanghai-based venture capital firm with $1.1 billion under management, with clean tech one of its key focuses.
Services and repair will be another headache. At present, Tesla’s Beijing store is the only service center in China. All Chinese buyers have to go there to pick up their vehicles. And, there is only one place for repair, at the Jin Gang Auto City in a northern suburb of Beijing.
As a comparison, Porsche has 63 service centers in China built over the past 10 years.
Tesla has plans to build a national network of supercharge stations and more service centers in China, but it will be years before it can be realized.
“Every EV company has a different battery, different charging stations. Trying to standardize the infrastructure sounds to me like a challenge,” says JPF Holdings’ Jack Perkowski.
Moreover, electricity supply in China is monopolized by state-owned electricity company State Grid. Tesla must make an agreement with that company if it is going to provide free electricity to its car owners, according to a State Grid executive quoted by Chinese media.
“The ‘green’ irony is that EV’s in China would almost entirely be coal electricity fueled, which on balance can be questioned in terms of fossil emissions,” says Chris Rynning, CEO of Origo Partners PLC, a Beijing-based private equity firm focused on the natural resources and clean tech sectors.
No China Subsidies For Tesla
A constant point of debate in the green tech sector is: Will the sector, whether it’s solar power, wind, or EVs, stand on its own without government subsidies or policy support?
Tesla in China will provide an interesting experiment on the question, because Chinese consumers currently do not receive any subsidies or preferential treatment if they purchase a Tesla.
Beijing recently announced a list of EVs that will receive subsidies ranging from RMB63,000 to RMB108,000. The six EV models on the list are DENZA and E6 made by BYD; Roewe E50 made by SAIC Motor; ZINORO made by Brilliance Auto; E150 EV and C70GB made by Beijing Automotive Group; and iEV4 made by JAC Motor.
According to the Beijing Demonstration and Application of New Energy Passenger Car Manufacturer and Product Administration Rules released by the Beijing municipal government, only EVs that are domestically manufactured, or manufactured by a Sino-foreign joint venture, will be considered to be on the list to receive subsidies.
China’s central government has also announced subsidies for EVs, which include RMB60,000 for a pure EV and RMB35,000 for hybrid models.
But these vehicles are selected from the Vehicle Production Enterprises and Products Announcement released by the Ministry of Industry and Information Technology, which also only include models manufactured by domestic or joint ventures car-makers.
In Shanghai, eight EV models manufactured by six companies are included in its subsidy list. Shanghai government offers EV purchasers RMB40,000 for a pure EV and RMB30,000 for a hybrid plug-in. On top of that, buyers can get free license plates, which cost around RMB70,000 in Shanghai.
All the subsidized EVs in Shanghai are also selected from the list made by theMinistry of Industry and Information Technology. They include Qin and E6 made by BYD…

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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