For the past 15 years, Elon Musk has built Tesla from a small electric vehicle (EV) startup to becoming a $46 billion company and the forerunner in the EV industry. However, despite their massive success in American and European markets, Tesla is yet to see a breakthrough in the Chinese market. China’s EV industry has grown rapidly in the previous years, producing more than half of global electric vehicles in 2018, while the US only produced 20 percent. The Chinese government has taken initiative in growing this market, providing over $60 billion in direct subsidies since 2012 to lower the cost of electric vehicles for Chinese consumers. Currently China is definitely the biggest market for EV’s, and for Tesla to succeed it is necessary to establish its presence in the country.

The biggest problem that Tesla faces in China is that its products are extremely expensive relative to its competitors due to transport costs and large import taxes which has been worsened by the trade tensions between the US and China. For example, a Tesla Model S that runs for $80,000 in the US will cost around $140,000 in China after taxes. In comparison, local EV companies in China sell their cars for as low as $10,000-$20,000, a sizable difference that makes it nearly impossible for Tesla to compete against.

Tesla is desperate in tapping the Chinese EV market and is aware of the problems they face, that is why they have worked towards building a Gigafactory in Shanghai in order for them to be more competitive in the domestic market. Once they are able to produce their cars domestically, Tesla will be able to establish a local supply chain, become eligible for EV tax credits provided by the government, and more importantly, evade the costs of duties and tariffs that have been inflating the prices of their cars.

Tesla’s case in China is a textbook example of the Tariff-Jumping Hypothesis. Musk believes that the biggest obstacle to Tesla’s success in China is affordability, and the only was to access the massive demand in the country is by producing domestically to make their products affordable. By doing this, Tesla is able to avoid tariff barriers and dramatically reducing the costs of their cars, making them more competitive against local EV manufacturers.

References:
Collins, J. (2019, March 05). Tesla’s Problems In China Highlight Its Biggest Threat: Negative Working Capital. Retrieved from https://www.forbes.com/sites/jimcollins/2019/03/05/teslas-problems-in-china-highlight-its-biggest-threat-negative-working-capital/#7c132c2b2b3c

Kolodny, L., & Evers, A. (2019, February 12). Tesla is staking its future on China – here’s what it’s up against. Retrieved from https://www.cnbc.com/2019/02/11/tesla-faces-steep-competition-in-china.html