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Tesla might lose ground to local pretenders, as likes of Xpeng, BYD steal a march with made-for-China EVs

Three in every five new cars entering China's roads are expected to be powered by electricity by 2030, according to a UBS forecast. In the first of a four-part series, Daniel Ren looks at Tesla, and whether it can hang on to its pole position in the world's largest and most competitive market for electric vehicles.

Zhang Hua spent three months looking at half a dozen electric-car models before deciding to ditch his eight-year-old Honda Civic.

The research fellow at Shanghai Jiao Tong University trawled websites for reviews, kicked tyres at half a dozen showrooms and asked detailed questions about resale values, add-on services and enhancements before settling on a P7 sedan made by electric-vehicle (EV) start-up Xpeng in early March.

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What sold him on the P7 was the EV's driver-assistance system and its voice-command functions. He paid 250,000 yuan (US$36,340) for the EV by the Guangzhou-based carmaker.

"I gave priority to the level of intelligence, because it's a digitalised era, where drivers and passengers demand more in-car entertainment activities and digital connectivity," Zhang said.

"Chinese-made smart electric cars are now good choices for middle-class consumers, because their technologies and services cater to our demands."

Zhang, 40, is not alone in thinking so. Tens of thousands of Chinese car buyers have been flocking to BYD, Nio, Xpeng, Li Auto and a number of China-domiciled EV makers of late, unseating Tesla as the most desirable EV brand in China and demoting the US carmaker to 10th place, according to a survey conducted by JD Power and Shanghai's Tongji University in December last year.

Nio's ET7 sedan topped the list, followed by Xpeng's G9 sport utility vehicle (SUV) in second place and Li Auto's L9, another SUV, in sixth place, according to the survey, which also assessed the vehicles' on-board technology and entertainment capabilities. JD Power did not reveal the number of respondents it surveyed.

"Tesla has been highly successful in China, based on its sales volume and brand recognition," said David Zhang, an analyst with the research centre for automobile industry innovation at the North China University of Technology. "But it is now facing the hard question of [how] it can stay ahead of the competition."

Keen on newer tech

Chinese EV buyers are particularly attracted by the bells and whistles in such cars, like their digital cockpits, their on-board entertainment systems and the ability of their voice-recognition systems to recognise various Chinese accents.

"Our conclusion is that Chinese consumers are more keen on new [in-car] technologies that can bring comfort and entertainment to them," said Jeff Cai, chief consultant at the JD Power China auto product practice, who concluded that the top 10 cars on the list understand at least 87 per cent of voice commands by Chinese consumers.

"For example, they prefer strong voice-command functions, which is very different from western drivers. Indeed, some Chinese smart-car assemblers have proved to be superior to global rivals in terms of digital cockpit development."

Nio's ET7 comes equipped with PanoCinema, a panoramic and immersive digital cockpit boasting augmented-reality (AR) and virtual-reality (VR) technologies. The PanoCinema system is powered by 256-colour curtain ambient lighting and a Dolby Atmos 7.1.4 surround-sound system.

Tesla's theatre function allows various video-streaming services to be played on its controls screen while parked. Model Y users are also able to use the steering wheel buttons to play video games through its Arcade system.

Tesla also offers voice-recognition technology to Chinese users, but the system does not work well in a noisy environment, the survey by JD Power and Tongji University said. Moreover, Tesla's Model 3 failed to make the top 10.

Despite its low ranking, however, Tesla continues to be the front runner in mainland China's premium EV segment. After a roaring success over the past three years, Tesla's China growth story remains intact and the company looks set to overcome dwindling consumer demand.

The Shanghai Gigafactory, Tesla's largest production base worldwide, is still working in high gear, while locally built Model 3s and Model Ys continue to be bestselling premium EVs, after recent heavy price cuts.

The Texas-based carmaker was once viewed by Chinese drivers as synonymous with intelligent EVs. After its Shanghai-made Model 3s hit the mainland market in January 2020, it drew rave reviews from Chinese drivers, even as Covid-19 wreaked havoc on the country's economy and hit consumption. The Model 3 was the mainland's bestselling EV until it was dethroned in September 2020 by a mini EV assembled by SAIC-GM-Wuling.

Tesla remains very popular. Last year, it delivered more than 710,000 Model 3s and Model Ys to customers on the mainland, a year-on-year increase of 50 per cent. In comparison, Beijing-based Li Auto, Tesla's nearest rival, handed over just 133,246 units to customers last year, but a year-on-year increase of 47 per cent for the Chinese carmaker.

"Our global customer survey indicates that Chinese car buyers highly value - and are more willing to accept - advanced new technologies, including autonomous driving and intelligent cockpit functionality," said Stephen Dyer, Greater China co-leader and head of the Asia automotive practice at global consultancy AlixPartners, referring to the company's survey from August 2021.

"Foreign carmakers had a head start with some of these technologies. However, Chinese players are rapidly catching up and, in many cases, surpassing their foreign peers."

Tesla cars are termed "international models" in China, because they are not specifically designed for mainland motorists and passengers.

People check out a Tesla in this file photo from the second China International Import Expo in Shanghai in November 2019. Photo: AFP alt=People check out a Tesla in this file photo from the second China International Import Expo in Shanghai in November 2019. Photo: AFP>

"They are not designed for Chinese drivers and passengers, and they are not the up-to-date smart vehicles that many rich Chinese consumers desire," said Eric Han, a senior manager at Suolei, an advisory firm in Shanghai. "But the cars are still deemed high-quality and value-for-money products in China, because of Tesla's strong brand awareness."

Geared for Chinese roads

Tesla's main Chinese competitors - Nio, Xpeng and Li Auto - have developed battery-powered cars ranging from sedans and coupes to full-size SUVs with longer driving ranges than the Model 3 and Model Y.

While the basic editions of Tesla's Shanghai-made Model 3 and Model Y can go as far as 556 kilometres and 545km on a single charge, respectively, the entry-level versions of Nio's ET7, Xpeng's P7 and Li Auto's L8 have driving ranges of 530km, 480km and 1,315km, respectively.

Aside from the ET7, Chinese smart EVs are fitted with AR and VR systems to offer passengers a so-called immersive experience, which Tesla cars lack. Moreover, Tesla's advanced driver-assistance system, its full self-driving (FSD) software, has not been approved for use in China. Chinese drivers of Tesla cars can, however, access autopilot, a driver-assistance system that allows the vehicles to steer, accelerate and brake automatically within their lanes.

Xpeng, which is backed by e-commerce giant Alibaba Group Holding, the owner of this newspaper, unveiled its X navigation guided-pilot (NGP) software - similar to Tesla's FSD - at the end of March. X NGP allows Xpeng cars to navigate automatically on city streets in mainland China.

"Tesla played a leading role in making EVs 'intelligent', but the city NGP, benefiting from our meticulous work, is not inferior to the FSD," said Wu Xinzhou, vice-president and head of the autonomous driving centre at Xpeng. "Were [the FSD] to be used in China, it might not be as efficient as ours due to complicated scenarios on China's roads."

Chinese media outlet Caixin said on April 1 that Tesla plans to test its FSD software on Chinese roads soon, but did not elaborate on whether the US carmaker would launch it in the world's largest EV market.

Tesla would not comment on its strategy and operations in China. The company said in a statement late last year that it would continue to innovate to boost the popularity of its locally built cars. "We will stick to innovation to drive product popularisation, use technology to drive productivity and lean on intelligence to lead lifestyle changes," Tesla China said.

Rethinking strategy

Tesla also sells its US-made Model S and Model X luxury cars in China, but they represent just a tiny portion of its total sales in the country.

Tesla's Gigafactory 3, based in Shanghai's Lingang free-trade zone, can churn out as many as one million vehicles a year after it expanded capacity by 30 per cent mid last year.

In January, Tesla said after reporting record profit for the three months ending on December 31 that there were no plans to further increase capacity at its Shanghai facility. The statement confirmed a report by the Post earlier that month about the carmaker's decision to put off building another assembly line at its Gigafactory 3 complex because of a lacklustre sales outlook.

Tesla is likely to produce a revamped version of its Model 3 at the Shanghai factory in September to enhance its competitiveness on the mainland. There will be changes to the exterior and power-train performance with a focus on production efficiency, Reuters reported last month.

On January 9, Grace Tao, Tesla China's vice-president of external affairs, told Chinese media outlet Economic Review, a subsidiary of state-owned China News Service, that the US company had never seen other EV makers as competitors, and urged all industry players to work together to fine-tune their battery-powered vehicles to meet the needs of customers.

Her remarks came after Tesla slashed prices of all its Shanghai-made vehicles to bolster mainland sales. The US carmaker cut prices on October 24 last year and January 6 in China, as a result of which the prices of its cars hit their lowest levels since the Shanghai factory began operations at the end of 2019.

"I expect Tesla to launch new locally built models in China," said Jane Kong, a Shanghai resident. "I will replace my Model 3 with one of them. The Model 3 does not look fancy and modern any more, now that Chinese carmakers are launching new models."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2023. South China Morning Post Publishers Ltd. All rights reserved.