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Tesla Fails To Take Advantage As China’s Car Sales Rebound

China is finally seeing its new vehicle sales go back up for the first time in nearly two years, with all segments, including electric cars bouncing back, while Tesla (NASDAQ:TSLA) experienced a steep drop in sales last month.

Tesla Model 3 sales in China fell over 64 percent last month compared with March 2020. That fall happened despite a 9.8 percent month-on-month increase in “new energy vehicle” sales in China last month.

All of this is happening as the Covid-19 crisis impact has started softening in China’s economy and the world’s largest auto market. But the industry’s leading trade group warns that the fight isn’t over.

The China Association of Automobile Manufacturers (CAAM), the country’s largest auto industry association, expects the total to drop 15 percent this year — from more than 25 million units sold in 2019. That will be the case even if the country continues to contain the coronavirus outbreak effectively. Much of that loss hit hard in the first quarter after the outbreak became China’s national emergency in December.

China’s auto sales reached 2.07 million units last month, up 4.4 percent from a year earlier. During the month, sales of new energy vehicles (NEVs) fell for a tenth month to 72,000 units, CAAM reported. These NEV numbers include passenger and commercial battery electric, plug-in hybrid, and hydrogen fuel cell vehicles.

For total new vehicle sales, the numbers sank 79 percent in February and 43 percent in March. These sales were hit hard by Covid-19 as the government’s strict stay-at-home orders kept buyers away.

“The sales rebound in April fell short of expectations but … will increase in the next two months” due to the release of pent-up demand as lockdown measures are further eased, CAAM official Xu Haidong said.

Tesla’s Model 3 is still the biggest EV seller in China this year, but the competitive pressure is mounting. Ford is finally seeing some gains and BYD took the lead last month. Tesla’s Elon Musk is still ambitious about China’s market, and expects Model 3 price cuts to help.

The China Passenger Car Association (CPCA) reports that the BYD Qin EV took the lead with 5,096 units sold last month, followed by the Ford Escape 1.5T plug-in hybrid electric vehicle at 3,999; and the Tesla Model 3 came in at 3,635 units sold last month in China. Before April, Tesla had been breaking the market trends, being one of the only cars in the market seeing sales gains while the overall China market plummeted.

CEO Elon Musk addressed concerns during the April 29 earnings call. Lowering the price of the Model 3 would be starting to happen, and should bring some of its competitiveness back.

“We are making rapid progress on lowering the production cost in China, and we’re actually excited to announce on this call that we will be reducing the price of the Standard Range Model 3 basically tomorrow China time,” Musk said at that time, according to a transcript. “And that will be a price below the subsidy limit, and we feel confident that that will still be a vehicle that delivers good gross margin.”

Ford, Volkswagen (DE:VOWG_p), and other competitors, are hoping that the Chinese government keeps its generous purchase incentives in place. Last month, the government discussed reducing rebates even if it does keep its earlier commitment to extending the subsidy program another two years. The generous subsidies have been behind China being by far the largest global EV market for several years. Manufacturers worry that the global pandemic and plunging oil and vehicle fuel prices will undercut their significant investments made in EVs for that market.

Musk has been counting on China being a good sign for investors to back further global growth — such as another factory going into Europe. Tesla and competitors were ordered by China to lock down factory operations and stores temporarily earlier this year.

Tesla’s Shanghai factory, which started production in October last year, became the electric automaker’s first plant located outside the US. The company was proud to begin delivering Model 3 cars to customers in China in January.

Musk has made it clear to local and state governments in California that he wants his Fremont plant reopened as soon as possible. The US market has been Tesla’s foundation for stability and growth — and expects that its upcoming Model Y compact crossover will help its financials.

But the outlook could be dark for the American EV market. The Covid-19 pandemic won’t be going away anytime soon, and drastically lower gasoline prices are having their effect on EV sales. Tesla and its competitors face a real double whammy in that key auto sales market.

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