For Tesla, China is an increasingly vital market, but future progress there could be undermined by public relations issues and emerging shortcomings in government relations.

Tesla has come under significant pressure in China this year for its perceived insensitivity in handling a series of customer complaints and also a lack of effort in establishing relations with government institutions, in what has become one of the company’s most important markets and a key global production centre.

Despite exceptionally strong growth in the local market in the last 15 months, or perhaps even because of this, the US’s leading electric vehicle (EV) manufacturer has come under growing scrutiny and speculation in the Chinese media and by other local organizations for what at most could be described as public relations blunders.

Tesla began the year with reports of a Model 3 exploding in an underground residential parking garage in Shanghai, which the carmaker blamed on damage caused by an impact involving the car’s undercarriage. In February the company was ordered to recall more than 36,000 cars due to a touchscreen failure. Both cases combined led to questions about Tesla product quality and its commitment to its customers due to its perceived high-handed responses.

Shortly after these events, local media began to report on allegations of shortcomings by Tesla in the area of government relations, citing its absence from government-industry forums and discussions often organized by the influential China Association of Automobile Manufacturers(CAAM). Such meetings are commonplace in China and are regularly attended by global players such as Volkswagen, GM and Toyota as well as local manufacturers.

Tesla has acknowledged it is now a significant player in the Chinese market and has made efforts to strengthen its government liaison team. It also attended several state-sponsored industry discussions in the last few months.

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The automaker has expanded very rapidly in China since it completed construction of its full-scale manufacturing plant in Shanghai at the end of 2019, which has allowed it to significantly cut manufacturing costs and also side-step local import duties. The plant began producing the Model 3 for the local market in January 2020, which it was able to pricesubstantially below the equivalent imported model.

Tesla quickly established itself as one of China’s top-selling EV brands, with the Model 3 becoming the country’s best-selling battery-powered model last year according to China’s Passenger Car Association (CPCA). The brand’s high international profile and a lack of competition in China’s premium EV segment helped it ramp up its presence last year.

Tesla’s revenues in China doubled to US$6.7bn in 2020, equivalent to roughly 21% of the company’s US$31.5bn global sales – up from 12% in 2019. It sold around 137,000 vehicles in the country, or more than 27% of its global sales, second only to the USA where it sold some 206,000 units last year.

The Shanghai plant began exporting the Model 3 in August last year with the first batch headed to Europe, followed by markets such as Japan, South Korea and Australia. At the end of 2020 it launched local production of the Model Y SUV, while annual production capacity at the Shanghai plant now estimated at just under 500,000 units.

Despite the growing tensions, Tesla’s sales in China continued to grow strongly in the first quarter of 2021 –by some 365% to just under 70,000 units, or close to 38% of the company’s global sales. This gave Tesla a 17% share of China’s battery-powered passenger vehicle market and a much higher share of the premium EV segment.

Tesla’s public relations troubles continued in late April, when an aggrieved customer climbed on top of a Model 3 at the Tesla stand at the Shanghai Motor Show to protest about the company’s handling of a complaint following a Tesla highway crash blamed on brake failure. Security guards are seen dragging away the protestor, videos of which went viral in the local and international media.

Despite the company apologising for its handling of the incident, the protests continued. Further analysis of the car’s digital log reportedly showed the brakes had been improperly applied by the driver, with a senior Tesla executive reported to have subsequently suggested the protestor may have been part of a PR plot against the company.

Earlier this year the Chinese government singled out Tesla by banning its cars from sensitive government complexes, including military bases, saying onboard cameras may breach national security. This development can be seen as part of broader government concern about the amount of consumer and other data being generated by carmakers and connected technology companies, however, including the use of onboard and roadside connected cameras and sensors.

Tesla’s sales fell by 27% month-on-month to 25,845 units in April, which the media quickly linked to the company’s growing image problems, despite it claiming to have suspended output temporarily to carry out regular plant maintenance. The CPCA also said Tesla exported a record 14,174 vehicles in the month, making it by far the largest Chinese exporter of EVs.

In May Tesla reportedly halted plans to buy a 210-acre plot of land next to its Shanghai plant to further expand its production capacity. While Tesla affirmed it never made a final decision on the purchase, people familiar with the matter suggested the company pulled out due to “uncertainty created by US-China tensions”. Under former President Donald Trump, the USA increased import duties on China-made vehicles to 25%, which limits the potential for exports.

China has become a very important part of Tesla’s global operations and the company, with significant justification, is becoming increasingly wary of placing too many eggs in one basket. The company is currently building a new car plant in Germany and is considering adding capacity elsewhere.

Tensions between the USA and China continue to grow and while US companies operating in China have yet to experience any tangible local repercussions, they are no doubt aware that local market sentiment can be turned very quickly here. Hyundai and Kia have yet to recover from the widespread consumer boycott of South Korean products in China following the diplomatic spat between South Korea and China in 2016 over the deployment of the US’ THAAD missile defence shield.