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Tesla, Inc (TSLA) Conquers Chinese Premium Cars Despite Crazy Taxes

Tesla Model 3 (TSLA)

Tesla, Inc is a clear investor favorite. This week shares began at a steady $305 a piece. Having recently overtaken General Motors and Ford in market cap, the company is proving just how far ambition and futurism can push its value. Resilient too, as shares seem largely unaffected by the company’s recent mass recall. However, Tesla still needs to expand its reach. The company’s next big focus is sure to be China and greater Asia. With a growing wealth class and a taste for cars that are foreign, opulent and flashy, China should ideally make Tesla feel very welcome.

Growing in China is easier said than done for the foreign juggernauts like Tesla. The Asian stronghold has shown less support for foreign corporations, slanting the table so Chinese businesses gain the upper hand. The country’s demand for luxury electric vehicles is on the rise, only the People’s Republic is big on protectionism too. Beyond that, industry policies and tax laws are constantly readjusted to suit the mood of the economy.

As it stands, there are numerous hurdles that stand in the way of Tesla’s ascension in China. Julie Ask of Forrester Research says American companies, even the very large ones, now find it increasingly hard to hold onto the country’s attention. She depicts the many forces working to slant Chinese markets in favor of local business. ”It seems there is an endless stream of ways to give their own companies an advantage,” Ask reports.

Companies in China are gaining more favor simply for being Chinese. “There is also a sense of pride of being a Chinese consumer and owning a Chinese [product],” writes a Kantar analyst, Lauren Geunveur. The likes of Tesla are notoriously foreign-built. The region’s growing sense of local product patriotism works against the growth of their sales.

Tesla Elon Musk
China will be challenging mostly because electric cars battle to compete with conventional gas cars on the cost front. Nearly every electric car producer depends on tax credits and government subsidies in order to turn profits. Sales take a massive hit as soon as the government sets up policies against them.

China avidly supports its homegrown auto industry. In order to deter the rise of foreign rivals, a tariff of 25 percent is placed on every imported car.

That tax rate effectively translates into the price of every Tesla EV sold in China. On the other hand, local electric car makers are better able to undercut the US company. With limited leeway, Tesla EVs are rendered premium, wealth-class purchases. Chinese import tariffs make them too expensive for the ordinary consumers. Even the Model 3 will have cost about $9,000 more on average in the region.

China can’t fend off Tesla

“Chinese products are simply not known for their quality — not even in China.” That comment came from Smarter Analyst’s Will Ubiefung. The analyst asserts that foreign car brands remain prestigious items in China. It is not that Chinese automakers are not able to produce great quality vehicles. The country’s great need for imported raw materials makes it difficult to rival foreign companies in terms of price. Not unless Chinese automakers slash the quality of their products too.

The Model 3 stands to do very well in China. Despite the major tariffs, there is no quenching the country’s growing thirst for foreign luxury cars. The Model 3 will still be seen as a more affordable car produced by a renowned US automaker. Once Tesla gets to building its assembly plant in the region, finally shaking off those import costs, its luxury cars will be much more obtainable.

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Based in Saudi Arabia, Siraj has a strong understanding of and passion for accounting and finance. He has worked for international clients for many years on several projects related to the stock market, equity research and other business, accounting and finance related projects. Siraj is a published financial analyst on the world's leading websites including SeekingAlpha, TheStreet, MSN, and others.