Why Elon Musk prioritized China over India

During the recent earnings call, Musk promised to launch less expensive models by end-2024. (Photo by ETIENNE LAURENT / AFP) (ETIENNE LAURENT / AFP)
During the recent earnings call, Musk promised to launch less expensive models by end-2024. (Photo by ETIENNE LAURENT / AFP) (ETIENNE LAURENT / AFP)


The Tesla chief executive chose China because its market is bigger. But competition is intense even there. Cheaper cars might hold the key.

Elon Musk's recent trip to China kicked up intense debates in India. It happened barely a week after the Tesla head cancelled a visit to India and a meeting with Prime Minister Narendra Modi. 

Musk was also expected to announce an investment of about $3 billion in India. He cited “very heavy obligations" at Tesla as a reason for cancellation. It turned out the Chinese visit had much to do with the heat the electric car company had been facing from the stock market.

The company reported revenues of $21.3 billion in the quarter ended March, down 9% from a year ago. This was the first drop in its revenues since 2020, when covid-19 disrupted production and deliveries. It also came amidst concerns about demand for electric vehicles (EVs), which is expected to grow only 11% this year, after 47% in 2023, as per UBS Group estimates.

Tesla had responded to the tepid growth by cutting EV prices, which hurt its financials. Its revenue per vehicle delivered in the March quarter dropped 5% year-on-year. Net profits, which were hit by additional factors, slumped 55%. Free cash flows turned negative, as the company built 46,561 more vehicles than it could sell.

Musk's trip to China, however, changed the negative sentiment. Tesla's share price, which was on a downward trend for months, jumped 15% a day after Beijing gave in-principle approval to roll out its full self-driving (FSD) cars there. During his visit, he also signed a deal with Baidu, which will open its mapping data and lane-level navigation service for the company.

Chinese competition

This breakthrough is considered to be important for Tesla, because China is the world's largest market for EVs. It has 54% of global electric car stocks. Almost 60% of new electric car registrations in 2023 were in China, against 10% in the US, according to the International Energy Agency's Global EV Outlook for 2024. China accounted for about 40% of Tesla's sales last year. However, it is a tough market, with growing competition and intense price wars. BYD's profits dropped 47% sequentially, due to price cuts.

If the price cuts continue, the industry could turn unprofitable, Goldman Sachs has warned, according to Reuters. It's not clear if the rollout of FSD in China would give a significant advantage to Tesla. Its Chinese rivals such as XPeng and Nio offer similar functionalities for lower or no cost to customers. Tesla offers its FSD system in the US for $99 a month.

Global play

Even if domestic competition makes the Chinese market tough, the country is still important for Tesla. With an annual capacity of 950,000 vehicles, Shanghai hosts Tesla's largest factory globally and is a regional export hub. Besides, China enjoys a cost advantage in batteries, a key component in EVs, due to its control of the mining industry. The administration also sees benefits in having Tesla and has allowed it to operate in the country without a domestic partner.

Also Read: Elon Musk shows why India can’t take China-plus-one narrative for granted

However, Tesla's close relationship with China has not gone down well in the US, which sees the Asian country as a geopolitical rival. In February, the US said it was probing potential security risks of Chinese-made cars. Tesla itself is fighting battles beyond the slowdown in EV demand. Last month, the National Highway Traffic Safety Administration in the US said it had opened an investigation against Tesla over its recall of 2 million vehicles last December following a series of crashes.

Indian potential

Tesla prioritized China due to these immediate concerns. However, India, which wants 30% of all new vehicle sales to be EVs by 2030, is expected to play a key role in Tesla's global ambitions. Electric four-wheelers are gaining ground in India. According to the Society of Manufacturers of Electric Vehicles, their sales jumped 90% in 2023-24, and their share in the overall EV market increased from 4% in 2022-23 to 5.4% in 2023-24.

However, to make inroads into the Indian market, Tesla might have to launch cheaper cars (its Model 3 and Model S are expected to be priced at 70 lakh in India). Even in the US, Tesla investors were concerned about the company's commitment to building cheaper cars. During the recent earnings call, Musk promised to launch less expensive models by end-2024. That could drive its sales in China too, even more than FSD.

www.howindialives.com is a database and search engine for public data.

Catch all the Corporate news and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.