Tesla took a major new step toward bringing its electric vehicles to a mass market. Construction teams broke ground on the Shanghai Gigafactory this week, which will start producing Tesla’s cheapest cars for the Chinese market later this year. As CEO Elon Musk danced on the stage, his company made a big jump into the world’s largest electric car market.
“We should expect a surge in Tesla sales in China in 2019 and 2020 due to shipments of the Model 3 to China this year, and then production of the Model 3 at the Gigafactory 3 in the latter half on 2019,” Scott Shepard, senior research analyst at Navigant Research, tells Inverse. Shepard warns, however, that this jump is “unlikely to be as significant as the surge in the U.S. in 2018.”
The third Gigafactory is set to play a key role in achieving the goals Musk laid out in Tesla’s 2016 master plan. The aim was to move from selling premium vehicles like the Model S to reaching a broader audience and transition more consumers onto sustainable energy. The mass market plan involved releasing a cheaper sedan called the Model 3, a compact SUV called the Model Y and a pickup truck. Since it entered production in July 2017, the Model 3 has surged to reach a staggering 119,000 U.S. sales in the second half of 2018, making it the fifth most popular sedan overall and the first in terms of revenue.
Hot off the Model 3’s success in North America, Musk is now initiating the next phase of the master plan. The company is aiming to bring the Model 3’s entry price down from $44,000 to $35,000, introduce the Model Y in March, introduce the pickup truck sometime later, and bring the Model 3 to international markets.
The new Gigafactory is key to this expansion, with plans to eventually produce 500,000 entry-level Model 3s and Model Ys each year. Musk explained this week that affordable cars “must be made on [the] same continent as customers.”
Shiv Patel, research analyst with ABI Research, tells Inverse that China accounts for 60 percent of global electric vehicle sales, representing a lucrative market for Tesla.
“Sales [of] BEVs in China is dominated by the lower end of vehicle segment spectrum, while outside of China, sales of BEVs is mainly as expensive, premium vehicles,” Patel says. “Clearly, if Tesla wants to compete in the competitive Chinese market, it needs to lower costs. Manufacturing vehicles in the country would be the best way to achieve this. The likely battery range advantage Tesla will have over local competitors, combined with its advanced vehicle software and technology, will place Tesla in a very strong position in China once Tesla can lower costs to the Chinese consumer.”
Plenty of new consumers are set to join the market, as Statista projects electric car sales in China jumping from 336,000 in 2016 to five million in 2025. The government is pushing even higher, aiming for seven million by 2025. Tesla has struggled to make an impact in China before, though, as slow deliveries and high prices hampered its early success. Building the cars in the country itself could solve some of its biggest issues.
“The nature of the Chinese EV market also explains why Tesla will initially focus on manufacturing ‘affordable versions’ of the Model 3 and Model Y for the Chinese market, whilst the Model S and Model X, as well as higher-cost versions of the Model 3 and Model Y, will continue to be manufactured in the U.S.,” Patel says.
Shepard is skeptical that Tesla can repeat its same successes abroad, though, particularly in an electric car-filled environment like China. Consumers can buy cars like the Geely Emgrand EV or BYD e5 for 140,000 RMB ($20,390), challenging Tesla on the lower end, while the NIO ES8 is priced at 448,000 RMB ($65,250) on the higher end.
“The surge is unlikely to be as significant as the surge in the U.S. in 2018,” Shepard says. “This is because Chinese automakers and new start-ups lead by NIO limit the amount of market Tesla can take.”
Bringing the cars closer to the consumer could also offer some other benefits. As tariff disputes continue between the United States and China, with China temporarily cutting its 25 percent tariff on American cars to 15 percent for the next three months, Tesla could offer more reliable pricing to consumers.
“The move insulates Tesla’s China business against trade disputes and gives the company better ability to reliably price their vehicles competitively,” Shepard says.
That’ll give Musk something to dance about.
Related video: Tesla Model 3 Under Construction at Factory