Electric Vehicle (EV) company Tesla Inc. is reaching the end of its first year selling China-made cars with a leading position in the world’s biggest EV market, however, Elon Musk shouldn’t rest on his laurels and stop putting in the big efforts.

While Tesla’s multibillion-dollar Shanghai churned out Sedans regularly to make the company top monthly premium EV sales tallies this year, 2020 was also marked by rivals making their moves. Tesla is set to face increased competition in 2021.

China’s electric-car market, while still in its infancy, belittles other countries and the Chinese government is working on further expansion amid commitments to reduce fossil-fuel use. Whether Tesla can grow into a global carmaker depends on its fate in China. The ambitious investors are banking on Tesla’s abilities and pushed the company’s shares up almost 700% this year.

The front line competition facing Tesla is the trio of local champions Nio Inc., Xpeng Inc. and Li Auto Inc. All the three startups are quickly winning fans and enjoying backing from government entities with sales of their electric SUVs, sedans, and crossovers also going up in 2020 and their shares surging on Tesla’s coattails.

“Since June, you’ve seen a steady rise in sales by Nio, Xpeng, and Li,” said Bill Russo, founder, and chief executive officer of advisory firm Automobility Ltd. in Shanghai, according to Bloomberg. “Can you stay competitive with these fast-moving, internet-backed, very deep-pocketed companies?” he added.

Local Rivals

China has emerged as Tesla’s most desirable market after the U.S., with 120,000 units sold this year, according to local registration data. As Tesla keeps working on increasing production in the city of Shanghai, analysts are prompted to forecast that Asia’s biggest economy will account for a bigger part of Tesla’s sales and earnings in the years ahead.

Wedbush Securities analyst Dan Ives said in a research note dated Dec. 21 that Tesla’s Model 3 sedans in China have higher profit margins than its vehicles in the U.S. and Europe, and up to 40% of Tesla’s sales by early 2022 could be raked in China. That compares with about 20% of the sales now.

“China could see eye-popping demand into 2021 and 2022 across the board with Tesla’s flagship Giga 3 footprint a major competitive advantage,” he said, referring to the Shanghai plant.

Expansion

Model Y, Tesla’s next big thing, which Musk anticipated, can outsell all other vehicles the company makes. While it is already being built in California, a Shanghai-assembled version of the vehicle is also clearing the final regulatory stages to start selling in China by next year. 

“China will continue to fuel Tesla’s global growth in 2021, more so than ever,” a JL Warren analyst, Sharon Li, said in a recent note.

China’s lower-tier cities, including Weifang and Linyi in northeastern Shandong province, are also home to Tesla centres as the company increases its geographic footprint. Meanwhile, smaller hubs, including Shijiazhuang and Haikou and larger cities, are also being focused on to bolster public and government relations.

The American company is starting local production of chargers in Shanghai to expand its charging network in more cities. It completed its 500th super-charging station recently, marching toward an annual target of 650.

Crowded Field

China Passenger Car Association (PCA), a trade group, has predicted that Tesla will sell as many as 280,000 vehicles in the country next year. While it is a positive for Tesla that it represents an impressive growth over 2020, more than 80% of the market will still be left up for grabs. For 2021, the PCA has forecasted total sales of 1.7 million new energy vehicles.

That means combining the three local premium brands Nio, Xpeng, and Li are increasingly a threat; they already approach Tesla’s monthly sales tally. SAIC-GM Wuling Automobile Co. and BYD Co., which sell cheaper electric cars, are also upping their game.

Chinese Challengers

The biggest of the Chinese trio of challengers, Nio, has steadily gained sales of its electric SUVs sold at a price as much as 40% higher than Tesla’s Model 3. The company has a proven retail strategy, including clubhouses with showrooms, workspaces, lounges, theatres, and even camp activities for customers’ children. Some pressure was felt by Nio earlier this year after a price cut by Tesla. Still, a subsequent reduction failed to have a similar impact, according to Nio CEO William Li on a recent earnings call.

“We didn’t see any specific impact on our order intake,” Li said. “This proves that we have our own unique advantages.”

Helped by lower prices than Tesla, Xpeng has also seen brisk sales growth. The company, which attempts to sell the smart features of its vehicles, raised $2.2 billion this month by capitalizing on a recent share-price surge and selling additional stock.

“I would call 2020 Year One of an intelligent electric-vehicle market in China,” Xpeng Vice Chairman Brian Gu said in a phone interview on Nov. 27. “We’re seeing really good sales of many good products.”

Common Threat

Conventional carmakers swiftly moving to electrified autos are the real rivals faced by Tesla and its Chinese competition. These include Volkswagen AG, which plans to introduce eight ID series, electric models, in China by 2023, and Daimler AG, the Mercedes-Benz luxury cars maker, which have launched the EQC electric SUV. Daimler AG plans to expand its lineup of purely battery-powered vehicles to at least 10 in the coming years.