Tesla’s prices in China have been playing the yo-yo this year due to the trade war between China and Trump’s administration.
After increasing the prices earlier this year, Tesla now says that it is slashing the price and absorbing the difference in order to continue to grow.
At first, it seemed to actually be working as the president included automotive products in the discussion.
Back in May, Tesla lowered its price by 40,000 yuan to 90,000 yuan (~$6,000 to ~$14,000 USD) depending on the model in China.
The automaker was doing it in preparation for a planned reduction of the 25% import duties that Tesla vehicles are subject to in China down to 15%.
But it backfired as the trade war started to escalate and in July, Tesla had to increases the price of Model S and Model X by over $20,000 in China due to new trade-war tariffs.
The company became subject to up to 40% in import duties for the vehicles it delivers in the country from California.
Now Tesla is again reducing the prices of its vehicles in China by 12 to 26%, but the automaker is absorbing the difference this time.
A Tesla spokesperson said (via Reuters):
“We are absorbing a significant part of the tariff to help make our cars more affordable for customers in China,”
After Tesla started Model 3 orders in China last week, they are also updating the price to 540,000 yuan (~$78,000 USD) for the Long-Range dual motor version and 595,000 yuan (~$86,000 USD) for the Model 3 Performance version.
Last month, Tesla said that it “accelerated” the construction of the Shanghai factory citing “cost disadvantage”.
“In addition, Tesla continues to lack access to cash incentives available to locally produced electric vehicles in China that are typically around 15% of MSRP or more. Taking ocean transport costs and import tariffs into account, Tesla is now operating at a 55% to 60% cost disadvantage compared to the exact same car locally produced in China. This makes for a challenging competitive environment, given that China is by far the largest market for electric vehicles. To address this issue, we are accelerating construction of our Shanghai factory, which we expect to be a capital efficient and rapid buildout, using many lessons learned from the Model 3 ramp in North America.”
On top of investing in local manufacturing, it now looks like Tesla is also reducing its gross margins on the vehicles in order to stay competitive.
That’s actually kind of worrying.
China has grown to be an important market for Tesla and there was no doubt that the new tariffs would have a big impact on demand, but I thought they would ride it out until they could start local manufacturing.
The thought was reinforced after Tesla increased its local prices, but now it quite apparently has to decrease them back down in order to maintain some kind of demand in the country.
It will be interesting to see how it will affect the company’s gross margins next quarter. Keep in mind that due to the long transit, price changes only have an impact during the following quarter for Tesla.
Tesla Gigafactory 3 really can’t come online soon enough.