On Monday, Bloomberg reported Tesla would raise the price of its vehicles in China on Friday. Initially, the electric carmaker had announced a price hike for that market would take place in September. Furthermore, CNBC noted the firm might increase the cost on its vehicles in the Asian superpower a second time in December.
Why Tesla is Raising its Prices in China
The Palo Alto, California-based carmaker is changing its Sino region prices in response to a pair of recent problems.
First off, the firm intended to raise its prices in relation to the recent weakening of the Chinese Yuan. Indeed, on Monday the Sino currency fell to its lowest level in 11 years against the dollar. As such, Tesla’s Chinese car sales are bringing in far less revenue than the corporation expected.
In the second quarter, the manufacturer sold a record number of vehicles to strong results in Chinese and European market. But, in part because of the recent currency fluctuations, the firm posted a $408 million loss in Q2 2019.
The other reason Tesla is raising prices in China is the ongoing Sino-American trade war. Because of a recent escalation of hostilities between the two nations, the Chinese Ministry of Commerce threatened to initiate a 25 percent tariff on U.S. made automobiles. Moreover, the agency said it plans to attach an additional five percent levy on American auto parts.
China’s commerce ministry suspended those car-related tariffs last year. But the government department said it would reinstate them following President Trump’s pledge to apply a 10 percent duty to Chinese made electronics imported to the U.S. this December.
Facing two different threats to its Sino profit margins, Tesla’s making the only move it can. However, by raising the prices on its products twice in one quarter, the company may put off local buyers. Furthermore, the Chinese government offers billions of dollars in incentives to induce citizens to purchase locally made electric vehicles.
Tesla’s Long-Term Plans for China
To its credit, Tesla does not intend to be a victim of shifting international trade relations indefinitely. Last year, the automaker announced plans to open an auto plant in Shanghai, its first international production facility. Once online, the factory will be capable of producing more than 500,000 cars a year.
As such, it would not only have comparable capacity to Tesla’s main Fremont, California production facility, it would be one of the large auto plants in the nation. The corporation established a factory in China because the local government intends to have 100 percent electric vehicles on the road by 2030. Besides, by manufacturing its cars locally, the firm would avoid paying the onerous import taxes that threaten to decimate its Sino region profit margins.
At present, the carmaker intends to open Gigafactory 3 auto plant at the end of this year. A recent Electrek article indicates the firm is in the process of testing production of its popular Model 3 sedan. Consequently, Tesla may choose to roll back the price increases on its fleet to be competitive with local vehicle manufacturers. Conversely, if the company has another unprofitable quarter this year, it might not be able to slash its pricing.