Tesla’s Fall From Grace in China Shows Perils of Betting on Beijing

Chinese electric carmaker Nio is targeting the premium EV buyers that Tesla needs to realize its own ambitions. Tesla’s experience is “a warning shot that they need to stay between the lines,” said Bill Russo, a former Chrysler executive who’s now chief executive officer of Automobility Ltd., a Shanghai-based consultancy. “You can’t be so far up front that you become arrogant in the way you conduct yourself.”

That could be particularly true as U.S.-China relations continue to deteriorate, with the two superpowers at odds over everything from the status of Taiwan to semiconductor supply chains. Beijing’s earlier generosity to Tesla, which included substantial assistance building its Shanghai facility and helping it reopen rapidly after the nationwide coronavirus shutdown, came at a time when Chinese policymakers were eager to demonstrate they were still open to international business.

Signals of a tougher stance toward Tesla came as early as February, when agencies including the State Administration for Market Regulation, China’s most important market watchdog, summoned executives to discuss what they said were quality and safety issues in Tesla vehicles, including reports of abnormal acceleration and battery fires. After the meeting, Tesla issued a statement so apologetic it verged on groveling, declaring it had “sincerely accepted the guidance of government departments” and “deeply reflected on shortcomings.”

Previously focused on state-run media, Tesla is now trying to build relationships with auto-industry publications and influencers on platforms such as Weibo and WeChat, for example by inviting them on factory tours, and conducting group “discussion sessions” with policymakers, consumers, and media outlets. According to people familiar with the matter, it’s also complained to the government over what it sees as unwarranted attacks on social media, and asked Beijing to use its censorship powers to block some of the posts

The impact on sales of the braking fracas and Tesla’s other Chinese headaches is unclear. Last month’s decision to recall its cars — for a software upgrade to help prevent drivers from accidentally switching on cruise control and having their vehicle accelerate suddenly — could also make consumers leery. In the wake of the auto show protest, research firm JL Warren Capital estimated that the controversy had resulted in a 50% drop in new orders over a period of weeks, based on observations of footfall at dealerships — amounting to a “meaningful and obvious” decline in demand. If that’s true, it’s too early for it to show up in official figures. While Tesla’s Chinese shipments climbed almost 30% in May, due in large part to brisk demand for the Model Y sports-utility vehicle, those statistics would reflect orders placed months before.

The broader question, given the realities of operating in China, is whether President Xi Jinping’s government has fundamentally changed its approach to Tesla. Until recently, the unspoken bargain between Musk and Beijing seemed relatively clear: in exchange for state support, the company would use its brand and high-tech expertise to attract Chinese consumers to electric vehicles, while pushing local manufacturers of EVs and components to up their game.

Still, while the growing technical competence of Nio, Xpeng, and other Chinese car companies means that Tesla’s role is probably not as essential as it once was, it’s “still a symbiotic relationship,” said Tu Le, a former Ford Motor Co. executive and the managing direct of Sino Auto Insights, a Beijing consultancy. To hit its ambitious targets for electrifying transportation, “the Chinese government needs Tesla to bring excitement to the sector,” he said.

It will take a few more months of sales data to determine whether Tesla is truly headed for a slump in the world’s biggest car market, or has simply encountered a series of speed bumps. If it turns out to be the latter, it will be thanks in part to the loyal following Tesla has built in the country — the kind of community of super-fans that helped propel its popularity in the U.S. and Europe.

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