The Link Between China’s 1 Child Policy & The Tesla Model 3’s Rise

January 1st, 2020 by Paul Fosse

It’s going to take me a little while to explain the headline, but I’ll get there.

It has been well documented that China’s 1 child policy (from 1979 to 2015) caused the sex ratio in China to skew heavily male. The preference for Chinese parents was to have sons, since sons in Chinese society have been traditionally responsible for taking care of their parents in old age. This has also had the effect of making women more valuable in the marriage market, which has caused a bidding war for brides.

The linked article mentions that families expect the groom to “supply an apartment and a substantial cash gift.” Another way that a groom can prove he is worthy of a bride is to drive a BBA car (stands for BMW, Mercedes-Benz, or Audi). This is more about virtue signaling than anything special about those cars. So, in a way, when we run an article showing how a Tesla Model 3 is as affordable on a total cost of ownership basis as a Toyota Camry or Honda Accord, that could actually have the effect of reducing the desirability of the car to grooms, assuming the in-laws read CleanTechnica. On the other hand, if they base their opinion of the groom on the purchase price (or even better, the environmental sustainability) of the groom’s car, Tesla owners will be fine.

What made me look into this was I was watching the delivery of the first 15 cars from Tesla’s Gigafactory 3 in China and I noticed that one enterprising young man used the occasion to propose to his girlfriend. So, let’s now delve into how big a market this is and how we expect it to affect each brand.

Global Sales Of The German Big 3

I downloaded the 2018 reports of the big 3 luxury automakers and put their totals and regional sales into an Excel workbook. The raw numbers aren’t very useful, but it got more interesting when I looked at the market share in each region (ignoring other luxury brands for this exercise).

You can see in the chart above that the brands’ market shares are quite similar in all the regions of of the world, with Audi being a little stronger in China than elsewhere and especially weak outside of the 3 major markets of China, USA, and Europe.

In this chart, we see what percent of the brand’s sales come from a given region. Once again, this shows Audi more dependent on Chinese sales than BMW or Mercedes-Benz.

So, why did I write in the title of the article that Tesla will hurt BMW instead of Audi? We have to look deeper at competitive positioning to answer that question. Part 4 of this Bloomberg Survey (US based) did a good job of identifying which cars are most vulnerable to Tesla’s increasing competitiveness in the entry-level luxury market. They compared the number of cars traded in for the Model 3 to the overall sales of that brand. Although more Toyota and Honda owners than BMW owners traded in their cars on the Model 3, those brands sell 5 (Honda) to 7 (Toyota) as many cars as BMW in the US, so every BMW traded in has 5 times as much impact on the company as one Honda does, and 7 times as much impact as each Toyota traded in. Why was BMW impacted more than Mercedes-Benz?

“One explanation is that the two brands, while both competing in the same price segments, target different definitions of ‘luxury.’ Mercedes is built for comfort and class, while BMW is defined by its driving performance. Comfort and class are hard to measure; for performance, you take the car to the track.

“The editors at Motor Trend magazine tested the Model 3 against the BMW 3 Series and found that the ‘Model 3 wins this competition because it has thoroughly rewritten the rules of what a compact sports sedan can be.’ BBC’s Top Gear ran the Model 3 against BMW’s more expensive M3 at Thunderhill Raceway Park in California, where the Tesla won by 2 seconds. The magazine cover screamed, ‘Electric Beats Petrol! Tesla Model 3 Outguns BMW M3.’”

Audi was about halfway between BMW and Mercedes in the Bloomberg survey, so it does have significant risk to its market share also.

Conclusion

I traveled to China in 2018 on a family vacation and noticed that Chinese families were very interested in the Tesla brand.

Tesla doesn’t break out car sales by region, but doing some very rough math on the financial figures in the 2018 10K, we see that Tesla had $1,757,147,000 in sales. Most of Tesla’s sales were in the automotive sector (I assume $1.5 billion), and in 2108, they only sold the more expensive Model S and Model X cars with an average selling price of about $150,000 (my estimate). This means they only sold about 10,000 cars in China in 2018. Why so few when I noticed the people I saw at the mall really liked Tesla.

Tesla was only selling the expensive models and had not started selling the Model 3. Tesla had to pay expensive shipping costs and tariffs, since Tesla didn’t have local production like its competition has had for years. Tesla was not eligible for EV incentives worth about $3,550 that are only available to locally manufactured cars

Tesla remedied the first issue with the shipment of the Model 3 to China in 2019, and according to focus2move.com, Tesla sales (up to November) were up to 38,079, about 25,000 of them being the Model 3, according to Jose Pontes of EV Volumes and CleanTechnica. This was up from about 2% of the German Big 3 sales to about 6% of their sales.

You can see when Tesla can compete with BMW, Mercedes, and Audi without the 3 penalties mentioned above, then they are able to outsell them. The factor unique to China is what the bride’s parents think of the car. We will need to be on the lookout for that information.

Since these 3 German brands each sell more than 600,000 cars in China, as Tesla is able to expand production locally to include the Model Y, I expect the California company to be able to sell a similar number by 2021 or 2022. Tesla will have a vastly superior product that will benefit from both local and national incentives and will have a much lower cost of ownership. With a broader product line and a second gigafactory, I think Tesla could exceed a million cars a year in China by 2025 or so. Similar to the USA, Tesla will take a significant share of BMW, Audi, and Mercedes sales, but there will be many people who prefer a more traditional car. The question these companies have to ask is, can they take the financial impact of losing half of their sales in China? And once they lose a customer to Tesla, will they ever be able to win them back?

If you decide to order a Tesla, use a friend’s referral code to get 1,000 miles (1,609 km) of free Supercharging on a Tesla Model S, Model X, or Model 3 (you can’t use it on the Model Y or Cybertruck yet). Now good for $100 off on solar, too! If you don’t have any friends with a Tesla, use mine. https://ts.la/paul92237









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