Price reductions have boosted Tesla’s sales in China, but analysts and even supporters warn that the American automaker must step up its long-term strategy to avoid getting choked out by competitors who move quickly in the largest market for electric vehicles.

First and foremost, Tesla’s January price cuts increased China-made vehicle deliveries by 18% over December. According to analysts, Tesla’s high profit margins have enabled it to wage a price war against rivals in China and elsewhere.

However, they assert that Tesla has fallen behind rivals in China when it comes to launching new models, enhancing navigation systems, and including opulent interior features or white-glove customer service to meet the widening range of consumer preferences for EVs.

“Tesla’s facing a serious problem of a very limited product mix,” said Cui Dongshu, secretary general of China Passenger Car Association (CPCA). “Its slowness to respond to Chinese consumers’ preferences has led to a very passive positioning for Tesla to rely on few means such as price cuts to stay competitive.”

Elon Musk, the CEO of Tesla, has admitted that his company may face its toughest competition in China.

Reuters contacted Tesla for comment on its China operations, but it did not respond. The price reductions in China, according to Grace Tao, vice president of Tesla responsible for external communications in China, reflect engineering innovation and are in response to Beijing’s call to promote economic growth and consumption.

According to China’s Association of Automobile Manufacturers, sales of EVs and plug-in hybrids will increase by 35% to 9 million vehicles in 2023, accounting for nearly one-third of all new vehicle sales in China.

In China, its second-largest market, Tesla has increased sales, but it has also seen a decline in market share. Data from the CPCA show that from 15% in 2020, its share of the China EV market decreased by a third to just 10% in 2022.

The Model 3 sedan and the Model Y crossover are the two models Tesla offers in China. This “keep it simple” philosophy has increased scale and decreased costs.

The Model 3 starts at around $34,000 and the Model Y at $38,000 following the most recent price reductions. However, after China’s strict COVID-19 curbs expired this year, Chinese car buyers returned to showrooms and are now being courted by rivals who are providing a wide range of alternatives.

The number of EV and plug-in hybrid car models offered by BYD, which surpassed Tesla in terms of global sales volume last year and has a market value well over $100 billion, is greater than 60. Nio, a much more modest but aspirational rival, increased its model lineup from two to six in the same time frame and intends to introduce five more this year.

“The aging product line is a real problem for Tesla,” said Yale Zhang, managing director at Shanghai-based consultancy Automotive Foresight. “Once BYD and other EV startups follow to lower prices, the effect of Tesla’s price cuts could vanish in the blink of an eye.”

Customers have also criticized Tesla’s self-driving software and navigation systems due to slow updates and mistakes on Chinese roads, despite CEO Musk touting them as competitive advantages. Luxury EV purchasers who hire drivers are less keen on forking over more money for the software.

Chang Yan, a 34-year-old Chinese auto blogger who purchased a Model 3 in China in 2018, claimed that despite being prohibited from doing so, his car is still requesting that he make U-turns on the closely patrolled Chang’an Avenue close to Tiananmen Square.

“This is a sharp contrast with Nio, (EV brands) Xpeng and Li Auto, whose navigation aids have been working almost perfectly,” said Chang, who also drives a Nio sedan.

According to a source with knowledge of the situation, Tesla has been thinking about changing its marketing strategy in China to emphasize energy efficiency and useful features rather than cutting-edge functionality.

In addition, the company has been researching how its Chinese rivals, led by BYD, attract customers in showrooms, particularly in smaller cities, according to the person, who declined to be named because they lacked authorization to speak to the media.

One lesson learned: BYD considers local preferences by making sure that the water bottles provided to showroom visitors are warm in the winter.

The person with knowledge of the situation said that Tesla, which earlier this year promoted its China Chief Tom Zhu to lead global sales and production, is also giving its China sales team a more direct line to product development engineers to receive local feedback.

Undoubtedly, many people still like the minimalistic, synthetic leather, and sparse interiors of Tesla vehicles.

After the recent price drop, Cui Yang, a 31-year-old doctor looking to purchase a Tesla in Beijing, claimed that “the minimalist interior style and tech feeling” had won him over.

On the other hand, Chinese manufacturers like Nio and Zeekr are known for their buttery-smooth Napa leather and classic luxury features like massage seats that are equally focused on the passenger experience as they are the driver’s.

In the upcoming years, some EV manufacturers predict that the premium market segment will grow quickly.

Targeting EV buyers who expect to pay more than Tesla’s current prices for family-friendly vehicles, starting at about $44,000, Li Auto is betting that this market segment will account for 10 million vehicles by 2025. Then, Tesla faces a “buy local” challenge.

Despite the fact that Tesla manufactures the electric vehicles it sells in China, Chinese consumers like 50-year-old Lin Wenwei prefer to support local brands.

“I have always been more inclined to buy a domestic EV brand for the national industry,” said Lin while he was trying out a Seal sedan for his son in a BYD dealership store in suburban Shanghai – after getting a BYD Dolphin hatchback for himself.

(Adapted from Reuters.com)