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Is Tesla’s blind spot in the Chinese market leading to its decline?

Written by 36Kr English Published on   9 mins read

Tesla and Elon Musk’s oversight of China’s EV market poses significant risks.

Tesla employees discovered their layoffs only when their access cards stopped working. Suppliers learned about production cuts with no more than a deck of presentation slides.

“The production plan is 3–4 days a week.”

Tesla suppliers were informed of the new production schedule solely from a slide during a meeting in the last week of April, without any prior notice. One supplier, who used to operate 6.5 days a week during its busiest period in Q1, noted that the new production plan signifies a 40% reduction from its peak orders.

Soon after, Tesla’s layoffs continued, high-level executives left one after another, and the supercharger team was heavily downsized. These events indicated that this wasn’t a simple order adjustment but a brewing storm.

On April 15, Tesla CEO Elon Musk announced a global layoff of at least 10%. Within a month, several key executives left, including Drew Baglino, senior vice president of powertrain and energy engineering, Rohan Patel, vice president of public policy and business development, and Rebecca Tinucci, senior director of charging infrastructure.

A Tesla employee revealed to 36Kr that the actual layoff ratio might be higher: “20% in China, and likely 15% in North America.”

The crisis didn’t come suddenly. At its peak, Tesla’s stock price surged twentyfold, and its market value surpassed that of 11 multinational automotive giants combined, including Honda, Volkswagen, and General Motors. However, since the end of 2021, Tesla’s market value has dropped from a high of USD 1.235 trillion to USD 574.4 billion.

After nearly two years of price wars, Tesla’s annual net profit in 2023 saw its first decline in seven years. Additionally, in Q1 2024, Tesla delivered around 387,000 cars globally, down 8.53% year-on-year and 20.2% quarter-on-quarter.

Despite securing the global electric vehicle sales crown, Tesla is showing signs of decline for the first time.

The global market environment is also worsening. Early this year, companies like Mercedes-Benz, General Motors, and Ford announced they were pausing their electrification plans.

The Chinese market is even more challenging, contributing a third of Tesla’s global sales and over half of its production. However, Tesla is facing intense competition in China. In April, the sales of Tesla’s Model 3 dropped to 5,065 units under the fierce competition from models like the Xiaomi SU7, IM L6, and Zeekr 001.

Promotional image of Tesla’s Model 3 electric vehicle.
Promotional image of Tesla’s Model 3 electric vehicle. Image courtesy of Tesla.

Musk’s focus on Tesla has also diminished, as he has been heavily involved with artificial intelligence, SpaceX, and X.

xAI, an AI company founded by Elon Musk, recently raised USD 6 billion in Series B funding to bring its first products to market. The company aims to build advanced AI systems that are “truthful, competent, and maximally beneficial for humanity.”

Employees are said to have felt this shift directly. An insider told 36Kr that Musk used to hold weekly meetings to check on new car development progress, but in recent years, these have been reduced to quarterly updates.

This former global leader in new energy vehicles seems to be at a crossroads.

Slowdown in new car development

In the Chinese market, the lifecycle of popular NEVs is typically measured in months. Tesla’s main models, the Model 3 and Model Y, were released in 2016 and 2019, respectively.

New products are the most direct way to expand market boundaries, but Tesla has continuously missed key time windows.

In 2018, Musk publicly stated in an interview that a USD 25,000 EV could be on the horizon, possibly launched within three years. That was meant to be a smaller but affordable mass-market car. However, six years later, little has materialized.

Screenshot of a video showing Elon Musk (left) in conversation with Marques Brownlee, a technology-focused YouTube content creator, during an interview filmed and published in August 2018.
Screenshot of a video showing Elon Musk (left) in conversation with Marques Brownlee, a technology-focused YouTube content creator, during an interview filmed and published in August 2018. Image source: Marques Brownlee via YouTube.

In his biography “Elon Musk,” Musk revealed the possibility of launching this new product in 2020, but later shelved the plan, repeatedly rejecting the idea over the next two years out of belief that it is “not really that exciting of a product.”

Musk’s ambiguous attitude toward this development has led to its troubled fate.

According to insiders, Tesla initially had two new car projects, a sedan and an SUV, codenamed NV91 and NV93, which were smaller versions of the Model 3 and Model Y, respectively. The NV91 project, which refers to the USD 25,000 car, was rumored to be the Model Q or Model 2, with a planned mass production date of August 2025.

However, in a meeting in February this year, both projects were claimed to be cut. Insiders said that one reason might be that these cars were mainly targeted at the Chinese market, but Tesla seemed to have lost confidence in the face of low-cost offerings from competing companies like BYD.

In early April, media reports on these changes led to a significant drop in Tesla’s stock price. Musk denied this news and announced a new plan: Tesla will reveal a robotaxi on August 8.

To fulfill Musk’s rapid release, a team has already been dispatched to support the robotaxi project. It is expected to involve a two-door small SUV, to be launched by the end of next year.

Meanwhile, the original Model Q has evolved into a simplified version of the Model 3, which could be released in half a year’s time.

This aligns with Musk’s statements, who mentioned in the Q1 earnings call that the low-cost model originally planned for the second half of 2025 would be produced earlier, possibly this year or in 2025.

Many in the market interpreted this as the Model Q, but it is no longer the same—while set to be sold at the same USD 25,000 price point, its gross margin is believed to be much lower than the previous Model Q.

Additionally, Tesla has planned a six-seat version of the Model Y for the Chinese market, while retaining the same chassis. This new car could be launched this year, subject to management approval.

However, based on the Model Y, this model’s interior qualities are unlikely to be highly competitive, and it remains uncertain if it will be approved for the market.

Promotional image of Tesla’s Model Y electric vehicle.
Promotional image of Tesla’s Model Y electric vehicle. Image courtesy of Tesla.

Tesla’s delay in launching new cars contrasts sharply with the rapidly changing external environment.

In 2024, the growth rate of the global pure EV market has noticeably slowed. Ford, GM, Mercedes-Benz, Volkswagen, and other European and American carmakers have announced pauses in their electrification. Tesla has been hit hardest. In Q1 this year, Tesla’s sales in Europe were around 66,200 units, down 4.7% year-on-year. In the US, sales were approximately 140,100 units, down 13.3% year-on-year.

The decline was especially pronounced in China. In April, Tesla’s wholesale EV sales in China were 62,200 units, down 18% year-on-year and 30.2% month-on-month, including exports to Europe and other markets. Domestically, Tesla sold 26,400 Model Ys and only 5,065 Model 3s in April.

Chinese consumers are losing their fascination with Tesla, as competitive products flood the market. When Xiaomi launched the SU7, its founder Lei Jun mentioned that one target user was Model 3 owners looking to upgrade. The SU7 has already locked in over 100,000 orders.

In addition, products like the Xpeng G6 and Li Auto L6 are continuously challenging the Model Y, and Nio’s second brand, Alps, have publicly stated that it is targeting for its new product, set to be launched in the second half of 2024, to be 10% cheaper than the Model Y.

Yet, Tesla’s decision makers seem unaware of the competitive landscape in the Chinese market.

In the eye of the storm

“As long as the cars are produced, they can be sold,” said Tom Zhu, who returned to Tesla to lead operations in the China region, in a speech aimed at motivating his team.

In April 2023, Zhu was promoted from president of Greater China to senior vice president of automotive operations, moving to the US to oversee Tesla’s global production, sales, and deliveries. Recently, under performance pressure, Zhu seems to have been tasked with a “firefighting mission,” returning to China to continue leading the region.

But many employees no longer have the same confidence as a year ago. Several Tesla suppliers told 36Kr that Tesla’s pickup speed has slowed significantly this year, leading to inventory pileup and order cuts by Q2.

China is Tesla’s second largest market. In 2023, Tesla sold 603,664 EVs in China, about a third of its total 1.81 million sales, second only to the 654,888 units it sold in the US.

The Chinese factory also contributes half of Tesla’s production capacity. Of the 1.81 million new cars delivered globally by Tesla in 2023, close to 957,000 were produced in the Shanghai factory. Additionally, the localization rate of parts in Tesla’s Gigafactory Shanghai has exceeded 95%. These factors have significantly supported Tesla’s high margins, heavily reliant on the Chinese market and its supply chain.

However, there seems to be a growing distance between Tesla China and its headquarters. An engineer shared with 36Kr that, “in the past, the headquarters would consider the Chinese division’s R&D as a backup plan, but after the layoffs, many permissions have been revoked.”

Some R&D and design work has started shifting back to North America, such as the battery development project in cooperation with CATL. “The battery line reports directly to the US, so China’s battery department might also be cut,” an insider told 36Kr.

This adjustment has made the rift between the headquarters and the Chinese division more apparent from a supplier’s perspective. When Tesla China notified suppliers of order cuts, suppliers naturally sought communication, shifting the burden to Tesla’s North American headquarters, as procurement decisions are made there, and Tesla China only executes them.

A core parts supplier told 36Kr that Tesla’s North American office compromised by shipping parts to China and having the local division find a warehouse to store them. However, there were no further instructions on how to handle these parts.

“As suppliers, we can’t wait, so we have to act as intermediaries, pushing the US and China divisions to communicate,” the supplier said.

Photo of Tesla’s Gigafactory facility in Shanghai, China.
Photo of Tesla’s Gigafactory facility in Shanghai, China. Photo courtesy of Tesla.

In early 2020, when domestic deliveries of the Model 3 commenced, Tesla was an unstoppable force. But now, the Chinese market’s competition is steadily eroding its market share.

The Model Y, which still supports Tesla’s sales, faces many competitors. The BYD Song L is priced between RMB 189,800–249,800 (USD 26,750–35,200), with the highest configuration cheaper than the Model Y’s starting price by RMB 100 (USD 14). The first car from Nio’s sub-brand, Alps, the L60, is priced at RMB 219,900 (USD 30,990), and the Xpeng G6 has a starting price of RMB 179,900 (USD 26,350).

New models are unlikely to boost Tesla’s sales again. If the USD 25,000 entry-level car had been launched in 2021 as Musk envisioned in 2018, it might have had strong competitiveness and become Tesla’s third blockbuster.

But now, the Chinese market offers too many choices. For RMB 180,000 (USD 25,370), buyers can choose from a variety of high-end models like the Xpeng G6, Geely’s Galaxy E8, BYD Han, Song L, and Tang DM-i.

Even the BYD Seal, once positioned against the Model 3, now costs only RMB 149,800 (USD 21,110), while the affordable, mass-market Qin Plus is priced at just RMB 79,800 (USD 11,240).

Tesla seems to have failed to sense the progress in the Chinese EV market in time, still using its traditional development logic to deal with the rapidly changing market.

For example, ultra-fast charging batteries can now support EVs to increase about 400 kilometers of range in ten minutes. Additionally, new types of lithium iron phosphate (LFP) batteries can adapt better to low temperatures, making EVs less dependent on mild climates and more suitable for colder regions.

However, these competitive trends from the Chinese market have not been valued at Tesla’s headquarters. An insider told 36Kr that data from Tesla’s North American office was analyzed to show that “drivers would stop every 300 kilometers to recharge, and each charging session lasted about 18 minutes, which was sufficient.”

Tesla’s focus on the 4680 large cylindrical battery and lack of new models, along with missing the technological trends in the Chinese market, led to many missed opportunities.

Yet, employees have noticed Musk’s return to the automotive business since April. He has started a series of internal adjustments and has begun face-to-face conversations with director-level employees, seeking solutions. Simultaneously, Tesla is betting heavily on AI and autonomous driving technology, similar to its focus on the large cylindrical battery.

“Tesla will spend around [USD 10 billion] this year in combined training and inference AI,” with the latter focused primarily on cars, Musk announced on social media in April.

Since becoming Tesla’s CEO in 2004, Musk has repeatedly put forward highly questioned ideas, creating problems, then breaking all constraints to solve them. It seems he is once again entering this cycle.

KrASIA Connection features translated and adapted content that was originally published by 36Kr. This article was written by Han Yongchang for 36Kr.


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