Tesla has begun to deliver its model 3 cars built in China. The U.S electric automaker said the delivery will take effect December 30, in preparation of full scale sales before the Chinese New Year.
In January, Tesla delved into its first production adventure outside the U.S. soil, building a plant in China. Production started in October with a target of 250, 000 vehicles a year when the Model Y was added to the initial phase.
It has been just a year since the company took the first steps in China, as a result of the government’s relaxation of its 50%+2 rules that opened the window for foreign automakers to establish in China for the first time in many years. The rule has kept foreign investors at bear for years and enabled indigenous growth of car manufacturers.
A statement from Tesla said that the first 15 customers to receive their cars today are the company employees. The Model 3 and Model Y cars are priced at 355, 800 Yuan ($50, 000) before subsidies were granted by the Chinese Government because the cars were produced from Tesla’s factory in Shanghai.
The Shanghai plant became a center of attraction to the locals from inception and the thrill of Tesla electric vehicles spurred overwhelming preorder earlier in the year. The plant also tuned down the intensity of the U.S-China trade war that cuts across many areas of investment with a negative impact.
China has become the world biggest auto market where electric vehicles are thriving. Last year, 1.3 million New-Energy Vehicles (NEV), were sold in the country, and it opened ways for further interests. Tesla is trying to cash in on the huge market by offering special treatment to china.
Apart from the subsidies for the first models of Tesla in the country, the automaker is offering racing events and showroom parties. It is also building service centers and charging stations across China to assure customers of standardized after-sales services, according to a report by Reuters.
The goodwill gesture appears to be mutual between China and Tesla as the Chinese Government has been supportive. The Ministry of Industry and Information Technology, said last week that it has added Tesla Model 3 to a list of new energy vehicles exempt from purchase tax. In August, the Ministry had announced that it has exempted all tesla models from purchase tax.
After the purchase tax exemption, the Model 3 orders spiked and hit around 6, 400. This is because the tax exemption lowered the cost of the vehicles. The lowest-priced standard-range version of that car is about $50, 000 (355, 000 Yuan) but it has been brought down to about $14, 000 (99, 000). The tax exemption is more like a subsidy and it has increased the demand, putting up a demand spike that Tesla has said it wouldn’t be able to meet in a short time.
The automaker said the Shanghai factory won’t be able to make Model 3s in high volumes, which means, producing 1, 000-2, 000 cars per week until mid-2020. Tesla’s CEO Elon Musk highlighted some of the challenges that need to be tackled to meet the current demand.
“We need to bring Shanghai factory online. I think that’s the biggest variable for getting to 500, 000-plus a year. Our car is just very expensive going into china. We’ve got transport costs, we’ve got higher costs of labor here,” he said.
So the possibility of making up the demand in China with cars produced in the U.S has been ruled out due to labor and logistics cost. Tesla is to rely completely on cars produced at the Shanghai factory to satisfy the demand, and that will take some time.
While China remains a promising market for Tesla, the challenge hangs on its capacity to meet the demand of buyers. The tax break is only for made-in-China cars and that has practically ruled out any possibility of shipment from the U.S. due to cost and Chinese trade laws, especially in the face of ongoing trade war with the U.S.
It is not sure how long the purchase tax exemption will be in play, but If the Shanghai factory fails to increase its production capacity before the Ministry of Industry and Information Technology withdraws the tax break, there may be a significant drop in sales for Tesla due to potential increase in the cost of purchase.