In China’s business circles, executives talk admiringly of a particular type of firm they refer to as a “catfish.” These companies, voracious competitors in crowded markets, force rivals to improve their performance or perish. In China’s hyper-competitive electric vehicle (EV) market, the metaphor of an aggressive fish gobbling up its lesser rivals until only the strongest remain is an apt one.
China has around 450 EV manufacturers, according to the Center for Strategic and International Studies, a Washington-based think tank. Only a handful of those companies actually sell cars, as few players in the capital-intensive industry have raised the money needed to build a vehicle. In the US, only three major car companies remain, the product of waves of painful consolidation during the 20th century that eliminated hundreds of automakers.
That’s why China’s government officials have rolled out the red carpet for Tesla: they see the American automaker as just the catfish they need to thin out the EV market. Beijing has showered Tesla with perks including lighting fast approval for its Shanghai factory. In 2019, Chinese premier Li Keqiang offered Tesla CEO Elon Musk China’s equivalent of a permanent resident permit; Tesla also became the first foreign car marker to set up a wholly-owned factory without a Chinese partner.
“The bureaucratic red tape wasn’t there,”said Bill Russo, a former Chrysler executive and now the CEO of Shanghai-based consultancy Automobility. “It was the opposite, there was a bureaucratic tail wind.”
One Chinese official even made his aims public. Miao Wei, the ex-head of the country’s industry and information technology ministry, welcomed the upstart this January, calling Tesla “the catfish that can invigorate a pool of water,” eliciting grumbles from China’s domestic EV manufacturers.
Beijing needs Tesla to prod Chinese competitors to innovate instead of coasting on government subsidies, and to convince foreign investors that they remain welcome amid souring US-China relations. China is now turning the screws on its domestic industry: It’s phasing out its EV subsidies and squeezing domestic automakers’ profits in the hope that any short term pain will be compensated by more globally competitive sector. Beijing-based think tank Anbound argues that Tesla’s presence will strengthen high-quality domestic EV supply chains in China, “and eventually help the Chinese electric car industry to thrive.”
For its part, Tesla needs China just as much, if not more. Tesla plans to produce and sell a record number of cars in China this year, its second-largest market after the US. Sales in China contributed $6.7 billion to Tesla’s revenue last year, accounting for around one-fifth of total sales. Tesla’s Shanghai factory churned out about 150,000 cars in China last year and expects to produce around half a million cars in 2021, according to Reuters, many destined for export to markets in Europe.
Publicly, Musk has offered nothing but praise for the country. “China rocks in my opinion,” he said during an interview last year. “The energy in China is great.” The executive has praised Beijing for being “very responsible” for its citizens, a line cited by Chinese state-owned tabloid Global Times, to polish the government’s battered global image abroad. And Zhu Xiaotong, head of Tesla’s operations in China, said Tesla’s expansion in the country will advance China’s goal of “dual circulation,” an initiative by Chinese president Xi Jinping’s to strengthen the country’s domestic markets, according to Chinese media.
How Tesla changed the view of electric cars in China
When Tesla sold its first Model S in China in 2014, the average car buyer saw EVs as either an imported luxury—“toys only for the rich,” as one Chinese financial outlet put it—or low-end domestic models bought for service fleets. Tesla changed that by marketing EVs not only as a replacement for traditional gasoline cars, but a desirable one as well. Today, China is the world’s largest national EV market, and Tesla’s Model 3 was the country’s best-selling EV in 2020. China accounted for 41% of global EV sales last year, a record 1.3 million new EVs, according to tech analytic firm Canalys. All new cars in the country should be electric, fuel-cell, or hybrid by 2035, up from 5% today.
“Tesla lit the candle and showed retail consumers it was OK to buy an EV,” said Russo of Automobility. He compared Tesla’s success to Apple’s transformation of the smartphone from a commodity into a coveted luxury for middle-class Chinese, opening up the market for local handset makers such as Huawei and Xiaomi. Tesla is now doing the same thing for EVs.
China’s own high-end EV brands such as NIO, Xpeng, and Li Auto, all founded shortly after Tesla’s arrival in 2014, have credited Tesla as an inspiration and competitor. He Xiaopeng, the founder of Xpeng, told Quartz in 2018 that one of the reasons he started the company was the experience of driving a Tesla for the first time (and its decision to make more than 200 patents available). “Tesla has created a huge impact on me,” said He,
Consumers unable to afford Tesla’s relatively expensive starting price—around 249,900 yuan ($38,392) for a Model 3—in China are turning to domestic EV brands from premium EV makers such as Xpeng to budget brands as Hong Guang Mini EV and Chery starting under $10,000. The top three EV makers sales surged by 350% in January compared to the same period last year. Some of the carmakers’ production is expected to ramp up to as much as 150,000 vehicles this year. Tesla’s made-in-China models are also helping support Chinese EV parts suppliers such as battery maker Contemporary Amperex Technology. In the future, Tesla is expected to use more parts sourced from local companies that are set to benefit from the company’s expansion.
What’s next for Tesla and China
This is all part of China’s big bet on EVs. “The Chinese government has been very open and very aggressive about supporting the development of electric vehicles,” said Steve Dyer, the managing director at AlixPartners and a former executive at Ford Motors. Since 2009, China has heavily subsided its “new energy vehicles,” low-emission technologies including plug-in hybrids, battery-only electric vehicles (BEV), and hydrogen fuel cell vehicles. Last year, it offered subsidies as high as 18,000 yuan ($2,766) per vehicle on average.
But a period of consolidation is coming. Car sales in China fell by 4% in 2019, after decades of growth. China is eager to phase out subsidies (policymakers only extended incentives through 2022 after an attempt to reduce them in 2020 caused a plunge in sales). All this will strengthen the position of potential acquirers as weaker players edge toward bankruptcy.
This market is “just taking shape,” according to Brian Gu, president of Xpeng, as incomes rise for China’s populace of 1.3 billion people. But a few dominant players have already emerged: premium EV brands NIO and Xpeng, as well as budget automakers including Hong Guang Mini EV, a joint venture between Chinese state-owned automaker SAIC and General Motors. The Mini EV sells for around $4,500, and even outsold the Model 3 in January.
But once China’s domestic EV brands can challenge Tesla directly, the company’s relationship with Beijing could become a bit more tricky. There’s already hints of frosty treatment from the government. In February, Tesla was summoned by Chinese regulators over complaints about quality issues including acceleration irregularities and battery fires following Tesla’s recall of over 35,000 imported Model X and S that month. One state-owned media outlet called the recall a sign of the company’s “ignorance in understanding Chinese consumers,” while another slammed the company for being “unreasonable and arrogant,” a 180-degree shift from its glowing praise less than a year earlier. Tesla said it has accepted the guidance from the authorities “sincerely.”
Yet there are no signs Beijing is withdrawing its preferential treatment of Tesla yet. Authorities seem ready to give Tesla a long leash as it helps accelerate the rise of the country’s EV industry. After all, Tesla’s role as a catfish isn’t finished yet.