Tesla has revealed its plans for China – including lower prices (TSLA)

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Tesla, the US-based electric vehicle (EV) maker, will begin delivering Model 3 sedans from its newly built Gigafactory in Shanghai, China, to domestic consumers in the next six to ten months, according to The Wall Street Journal (WSJ).

The vehicles will be available within the country at a much lower price than those Teslas it currently imports. For example, the Model 3 Standard Range Plus will cost $47,510, 13% lower than what Chinese consumers are paying to import basic Model 3s from the US.

Here’s what it means: Telsa’s announcement puts it on track to hit its own timetable for selling domestically manufactured cars within China, which will be crucial if the company hopes to take full advantage of the massive Chinese EV market.

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Tesla started building the Shanghai Gigafactory in January, with a goal of starting production later this year and reaching volume by 2020. Tesla’s assertion that it will begin deliveries from the factory in six to ten months suggests it will hit this production goal — something of a rarity for the company.

This will let it take advantage of China’s favorable EV regulations, which include a consumer subsidy that is expected to be cut in 2020. If the subsidy enables Tesla to drop its prices even further, the company could carve out a stronger position in the highly lucrative Chinese market.

It’s important for Tesla to get its China strategy right, as the country is — and will continue to be — the world’s largest EV market. In 2018, China accounted for nearly 1.1 million EV sales, and with 2.3 million units, it owned almost half of the world’s EV stock, according to the International Energy Agency.

The market has been off to a positive start in 2019, with 254,000 EVs sold in Q1 2019, a 118% year-over-year (YoY) jump from the 117,000 sold in Q1 2018. Ultimately, China is expected to maintain its market-leading position for the foreseeable future, as annual EV sales are expected to reach nearly 5.5 million units in 2025.

The bigger picture: Tesla will struggle to become a market leader in China, but it won’t matter for the company’s long-term growth.

The Chinese EV market is incredibly crowded, with 487 registered EV makers in the country as of last summer, per The WSJ. The short-term prospect of Tesla beating out all of these companies is unlikely, even despite Tesla building a local presence. However, being No. 1 in EVs shouldn’t matter to the US-based manufacturer: China presents such a massive opportunity that even capturing a few percentage points of market share could immediately drive growth.

In the long term, Tesla could be in position to capture a much larger piece of the pie as the industry consolidates. Shen Haiyin, CEO of China-based electric car startup Singulato Motors, believes that just 10% of today’s Chinese EV companies will be around in five years, and some auto analysts, have this figure as low as 1%.

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