Tesla Inc.'s sales in Hong Kong plummeted after authorities slashed a tax break for electric vehicles on April 1, demonstrating how sensitive the company's performance can be to government incentive programs.

Official data from Hong Kong's Transportation Department, analyzed by The Wall Street Journal, show that no newly purchased Tesla Model S sedans or Model X sport-utility vehicles were registered in April in the Chinese territory, and only five privately owned electric vehicles were registered in May.

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The collapse followed a surge just before the tax change, which had been announced in February, with new registrations of almost 3,700 Tesla vehicles in the first quarter -- including 2,939 in March alone -- compared with 1,506 vehicles in the entire second half of 2016.

The swing was significant for Tesla, which reported that its vehicle deliveries globally topped 25,000 in the first three months of the year, the auto maker's best sales quarter ever, but fell to just over 22,000 in the second quarter.

The more recent total put Tesla within its first-half target range but below analysts' expectations for the quarter, and fueled concerns among analysts and investors that demand for Tesla's current two models is weakening ahead of the launch of the Model 3, a $35,000 sedan that begins production this month.

The concerns helped push Tesla's share price down over the past week, after a surge earlier this year that pushed its value above that of Ford Motor Co. and General Motors Co.

"Tesla welcomes government policies that support our mission and make it easier for more people to buy electric vehicles, however, our business does not rely on it," Tesla said in a statement. The company said its sales revenue in China, where it faces large tariffs, has risen without government incentives. "At the end of the day, when people love something, they buy it," it said.

Buyers of Teslas and other electric vehicles in many markets benefit from government incentives. Tesla notes on its website that U.S. purchasers are eligible for a $7,500 federal income tax credit, plus additional incentives in some states.

The company also sells state zero-emissions vehicle credits to auto makers that don't reach government fuel-efficiency standards.

Tesla warns investors in securities filings that such incentives can change and says that "could have some impact on demand for our products and services." Last year in Denmark, an incentive program expired and was replaced with a less generous one.

The incentive policies can be controversial. During the Obama administration, Tesla received loans to encourage electric-vehicle development. Though it ultimately paid them back, critics have cited that assistance in arguing Tesla unfairly benefited from U.S. government help.

Tesla Chief Executive Elon Musk has rejected such contentions, saying during an analyst call in May the notion that his company has survived because of government subsidies and tax credits "drives me crazy." Tesla says on balance, industry incentive structures still benefit traditional, combustion-engine vehicles.

Hong Kong, though relatively small, is a significant outpost of luxury car buyers and trend setters. Its government had long waived its vehicle registration tax for newly purchased electric automobiles, adding to the attractiveness of Tesla's cars.

Citing increased congestion of privately owned vehicles on its streets, the government said in February that it would be changing the policy so the tax would be waived only on the first 97,500 Hong Kong dollars (about US$12,500) of an electric car's purchase price for individuals. After the change came into effect on April 1, the cost of a basic Tesla Model S in Hong Kong effectively rose to around US$130,000 from less than US$75,000.

The reduced waiver, which doesn't apply to sales of commercial electric vehicles such as buses, is effective through March of next year. The government says it will review the policy before then.

The Hong Kong registrations data don't show actual sales figures but are a close proxy because new cars in Hong Kong must be registered to be driven. The May figure, which hasn't been published, was provided to district council members and viewed by the Journal.

The end of the tax exemption "has really put the brakes on electric-vehicle adoption in Hong Kong," said Mark Webb-Johnson, a founder of Charged Hong Kong, a group that promotes electric vehicles.

Tesla doesn't break out vehicle sales by country or region and declined to discuss specifics in Hong Kong. But it acknowledged in a statement a slowdown, calling it "expected" following the tax change and a "short-term" challenge. The company said it continues to sell vehicles in Hong Kong each quarter and expects "the Hong Kong market will continue to be very strong over the long-term because it's clear that the people of Hong Kong love our cars."

The reversal in Hong Kong comes as Tesla is planning to expand in mainland China, the world's largest new car market. Last month, Tesla said it was exploring with the Shanghai city government the possibility of opening a manufacturing facility in China. China charges a 25% duty on all imported cars.

Dave Sullivan, an analyst for the consulting firm AutoPacific Inc., said the Hong Kong decline could foreshadow challenges for Tesla as a luxury brand in China.

"Hong Kong is the fashionable China," he said. "It's not exactly painting a glowing picture for the future of Tesla in China."

Write to Tim Higgins at Tim.Higgins@WSJ.com and Charles Rolletat Charles.Rollet@WSJ.com

(END) Dow Jones Newswires

July 09, 2017 07:14 ET (11:14 GMT)