Tesla goes against the grain in China by slashing price of premium car

PUBLISHED : Wednesday, 05 February, 2014, 11:19am
UPDATED : Tuesday, 24 November, 2015, 12:03pm

In China, where higher prices mean prestige, Tesla, a US maker of luxury electric cars, is taking a bold step to win customers and cachet by restricting its mark-up to half of what some of its rivals can command.

Though it risks relegating its brand to a lower tier, Tesla's marketing strategy could prove a model for other imported brands, which have come under fire from state media and regulators for allegedly ripping off shoppers with inflated prices.

In an unusual blog post last month, the firm announced the lower-than-expected 734,000 yuan (HK$933,000) China price tag for its high-end Model S electric car. The price, still 50 per cent higher than in the United States, includes only "unavoidable" taxes and transport costs, it said.

"If we were to follow standard industry practice, we could get away with charging twice as much for the Model S in China as we do in the United States. But we're doing things differently," Tesla said in the blog post on January 22, reposted to consumers through popular social media channels on the mainland.

The post, titled "A Fair Price", drew overwhelming support from the mainland's netizens. One reader survey on popular site which received over 80,000 votes, showed that 90 per cent of consumers supported the US carmaker's move.

Analysts said the lower price strategy could deter buyers in the premium segment, who are usually willing to spend extra to guarantee quality and cachet.

"Price transparency helps, because people see that as different, but the lower price itself, I don't see a big impact from that," said Andreas Graef, Shanghai-based principal focused on vehicles at consultancy A.T. Kearney.

Carmakers often charge steep mark-ups in China. Daimler's high-end Mercedes-Benz SLS AMG model costs 3.1 million yuan, 150 per cent above its US starting price. Volkswagen's Audi TT Coupe costs 519,000 yuan in China, over twice the US starting price.

While other carmakers already offer price rebates in China to lure buyers, Tesla is the first to make a clear statement about charging Chinese shoppers the same as in overseas markets, turning transparency into a neat marketing ploy.

"It's not just about the pricing strategy but more to show how to communicate with Chinese consumers in the context of a more transparent pricing world," said Shawn Wu, Shanghai-based project manager at consultancy SmithStreetSolutions.

Last year, Tesla's total car sales were about 22,500, mostly in the US. The California-based company, which plans to open dealerships in 10 to 12 Chinese cities by the end of the year, says it expects China to contribute a third of its sales growth this year.

Foreign makers of products ranging from milk powder to handbags have traditionally been able to charge steep premiums for high-end products in China, where price is often closely associated with quality and prestige.

But with closer attention from state media and increasingly savvy shoppers, consumers have grown dissatisfied with artificially high prices, said Oceanne Zhang, leader of market insights for consultants Kantar Retail.

"They can just check overseas prices or travel abroad, and they realise what they are paying extra for is not a premium in other markets. It's only a premium in China," she said.

Firms including US retailer Wal-Mart Stores and coffee house chain Starbucks have attracted the attention of China's state television and regulators for their high prices.

High prices prompted China Central Television (CCTV) to say the market had become a "treasure bowl" for global carmakers last year. A report in December singled out firms including Audi and Jaguar Land Rover, owned by India's Tata Motors.