Tesla Will Build Model 3 In China, Musk Says

Elon Musk is in China this week, where he told an audience at Tsinghua University that his company will begin building the upcoming Model 3 “affordable Tesla” in a Chinese factory within 2 years, according to Sina Technology. That marks a wholesale shift in how Tesla plans to sell its cars in China. Until now, all its cars were built in Fremont, California and imported.

Tesla made a big splash when it started selling the Model S sedan in China two years ago. News that the company was about to tap into the world’s largest market for new cars sent its stock soaring. But a funny thing happened on the way to the Imperial Palace; its sales projections proved grossly optimistic. Chinese customers complained that there were too few places to plug in their expensive new vehicles. But the biggest problem was that Tesla did not fully understand the cultural component of selling cars in China.

China is a really big country will lots and lots of people and most of those people live in huge cities. Let’s put that into perspective. There are 9 cities in America with a population of more than a million. China has 106, with more being built all the time. An automobile is not much good if you can’t drive it on public streets. Unless you plan to live in it, you also need a place to park it.

In China, you don’t just buy a new car and then hop over to the Registry of Motor  Vehicles and pick up your license plates. Oh, no. First, you have to prove to government officials that you have a parking place for your new ride. After that, you have to enter a lottery to get a registration for the car. Some Chinese drivers wait up to 5 years before they get their car licensed and on the road. But if you have an electric car, you move to the head of the line and can get your registration immediately. Unless your electric is imported. Then you go to the back of the line again. Oh, dear.

China also imposes significant import duties on cars manufactured in other countries. That’s why General Motors, Ford, Toyota, BMW, Volvo, Jeep and every other manufacturer in the world have been making cars for the Chinese market in China for the past decade. If you want to sell in China, you need to partner with a Chinese company.

As a result, Chinese car buyers have become accustomed to driving automobiles made in China. The upshot is, if you want to sell cars in China that are affordable, you need to create a partnership with a domestic manufacturer. But Tesla is a disruptor, remember? It does not consider itself bound by what everybody else does. It prefers to chart its own course. Except in this case, it’s course went off road, through the woods, across some rocks, and over a cliff. Now it has apparently seen the light and will amend its ways.

Tesla says its Chinese factory will utilize exactly the same technology employed at its factory in Fremont. That should result in a Model 3 that cost about $35,000, has a range of 200 miles or more, and comes with no import duties. It will also satisfy Chinese customers that they are buying a domestically manufactured car and Chinese regulators that it qualifies for preference when it comes to registering the car.

Call it Tesla Chinese Sales Strategy 2.0. Even disruptors are constrained by reality sometimes.