Tesla's Fall From Grace In China Shows Perils Of Betting On Beijing

Huang Jiaxue, a businessman in Wenzhou in eastern China, was thrilled when he got his Tesla Model 3 late last year. The car was good-looking, environmentally friendly, and even domestically built, having rolled off the line at California-based Tesla's vast factory in Shanghai. But in May he sold it, recouping only about 75% of the 249,900 yuan ($38,600) he paid. "It's out of safety concerns," Huang said, citing reports on Chinese social media, vigorously disputed by Tesla, about the brakes failing in its vehicles. "Reading about it every day, I've been afraid of driving."

There's little-to-no concrete evidence there's anything wrong with the brakes in Tesla's China-built cars. What is clear, however, is that the remarkable honeymoon Elon Musk enjoyed in the world's most populous nation is over. After receiving red-carpet treatment from government officials, who granted Tesla the unprecedented concession of allowing it to wholly control its local subsidiary, the carmaker is now being forced to rethink its strategy, from customer service to public relations, in a market that's key to Musk's long-term ambitions.

The overhaul is a response to an unusual degree of attention from regulators, as well as a rash of negative press coverage and online criticism. Last month, the Chinese government ordered a recall of almost all the cars Tesla has sold in the nation - more than 285,000 in all - to address a software flaw. At the same time, the vehicles are being banned from some government facilities over concerns they could send data to the U.S., and local carmakers like Nio and Xpeng are mounting a vigorous challenge to Tesla's dominance, winning over consumers with increasingly stylish designs.

None of these problems, of course, are unfamiliar to most foreign businesses in China, where a crash in consumer perceptions is often just one social-media storm away. But to a certain extent, that's the point: Tesla's high-tech halo, and Musk's star power, may no longer be enough to protect it from the risks that others face there. The company appears to have misjudged the strength of its ties to the country's leadership, a mistake that could threaten Tesla's growth prospects in its second-largest market. It also provides compelling evidence of how fraught operating in China can be, even for those who appear to enjoy every possible advantage.

Tesla's experience is "a warning shot that they need to stay between the lines, and not be so flamboyant in their success," said Bill Russo, a former Chrysler executive who's now chief executive officer of Automobility Ltd., a Shanghai-based consultancy. "You can't be so far upfront that you become arrogant in the way you conduct yourself."

That could be particularly true as U.S.-China relations continue to deteriorate, with the two superpowers at odds over everything from the status of Taiwan to semiconductor supply chains. Beijing's earlier generosity to Tesla, which included substantial assistance building its Shanghai facility and helping it reopen rapidly after the nationwide coronavirus shutdown, came at a time when Chinese policymakers were eager to demonstrate they were still open to international business. With China's borders now all but sealed, and President Joe Biden's administration making clear that it views the country as a long-term strategic rival, that imperative may no longer be as powerful.

Signals of a tougher stance toward Tesla came as early as February, when agencies including the State Administration for Market Regulation, China's most important market watchdog, summoned executives to discuss what they said were quality and safety issues in Tesla vehicles, including reports of abnormal acceleration and battery fires. After the meeting, Tesla issued a statement so apologetic it verged on groveling, declaring it had "sincerely accepted the guidance of government departments" and "deeply reflected on shortcomings."

If anyone at Tesla believed that response would prevent consumer complaints from becoming a major story, they were soon disappointed. At the Shanghai Auto Show in April, a woman who claimed that a brake failure in her Model 3 had caused a crash, nearly killing four of her family members, staged a solitary protest at the Tesla booth. After climbing on top of a vehicle wearing a T-shirt that read "brake lost control" in Chinese, she was quickly hauled away by guards. But the woman's presence at the high-security ticketed event - and the fact that images of her circulated uncensored on social networks - prompted industry observers to wonder whether officials were quietly supportive of her actions.

Tesla's initial response was combative, with external-relations chief Grace Tao suggesting the woman was being manipulated by others. The company said that vehicle data showed her car was operating normally at the time of the accident. But as criticism mounted online, and state-run news outlets demanded the automaker reconsider its response, Tesla was forced to recalibrate, issuing a formal apology and providing detailed data to the protester.

A female Tesla owner climbed on top of a car's roof at the Tesla booth to protest her car's brake malfunction at the Shanghai auto show Monday. The booth beefed up its security after the incident. pic.twitter.com/ct7RmF1agM

— Global Times (@globaltimesnews) April 19, 2021

It also began an effort to better manage how it's perceived by consumers.

Previously focused on state-run media, Tesla is now trying to build relationships with auto-industry publications and influencers on platforms such as Weibo and WeChat, for example by inviting them on factory tours, and conducting group "discussion sessions" with policymakers, consumers, and media outlets. According to people familiar with the matter, it's also complained to the government over what it sees as unwarranted attacks on social media, and asked Beijing to use its censorship powers to block some of the posts.

At the same time, the overhaul is bringing Tesla's top Chinese executive, Tom Zhu, more directly into its dealings with the outside world, other people familiar with the strategy shift said. A technical specialist who originally came to Tesla to build out its mainland charging network, Zhu has relatively little experience of public or government relations, and has focused for most of his tenure on production and sales. Now, the people said, he's become the primary decision-maker on communications matters, asking to review statements on topics of significant public interest before they go out.

A representative for Tesla in China declined to comment for this story.

The impact on sales of the braking fracas and Tesla's other Chinese headaches is unclear. Last month's decision to recall its cars - for a software upgrade to help prevent drivers from accidentally switching on cruise control and having their vehicle accelerate suddenly - could also make consumers leery. In the wake of the auto show protest, research firm JL Warren Capital estimated that the controversy had resulted in a 50% drop in new orders over a period of weeks, based on observations of footfall at dealerships - amounting to a "meaningful and obvious" decline in demand. If that's true, it's too early for it to show up in official figures. While Tesla's Chinese shipments climbed almost 30% in May, due in large part to brisk demand for the Model Y sports-utility vehicle, those statistics would reflect orders placed months before.

The timeline

The broader question, given the realities of operating in China, is whether President Xi Jinping's government has fundamentally changed its approach to Tesla. Until recently, the unspoken bargain between Musk and Beijing seemed relatively clear: in exchange for state support, the company would use its brand and high-tech expertise to attract Chinese consumers to electric vehicles, while pushing local manufacturers of EVs and components to up their game.

That was true despite Musk's ties to the U.S. government through SpaceX, which is a major Pentagon contractor, as well as his plans for Starlink, a satellite broadband system that could hypothetically allow users in China to bypass the firewall around the domestic internet. A former Tesla executive, who asked not to be identified discussing internal matters, said they believed the generosity of the Chinese government's assistance may have given their ex-colleagues an inflated sense of their value to Beijing, rather than an understanding it could melt away as soon as the state's priorities changed.

A shopper walks past a Tesla showroom in Shanghai

Still, while the growing technical competence of Nio, Xpeng, and other Chinese car companies means that Tesla's role is probably not as essential as it once was, it's "still a symbiotic relationship," said Tu Le, a former Ford Motor Co. executive and the managing direct of Sino Auto Insights, a Beijing consultancy. To hit its ambitious targets for electrifying transportation, "the Chinese government needs Tesla to bring excitement to the sector," he said.

One possibility is that views at different levels of the Chinese state have diverged, with trade- and development-oriented officials still eager to accommodate Musk. In late May, according to two people familiar with the situation, China's Ministry of Commerce and the government of Shanghai, where Tesla is a significant source of employment and cachet, held meetings with the company to emphasize their continued support for its expansion. Officials stressed, however, that they expected Tesla to comply with laws requiring customer data to be stored domestically, something it has promised to do.

It will take a few more months of sales data to determine whether Tesla is truly headed for a slump in the world's biggest car market, or has simply encountered a series of speed bumps. If it turns out to be the latter, it will be thanks in part to the loyal following Tesla has built in the country - the kind of community of super-fans that helped propel its popularity in the U.S. and Europe.

Yang Fan, a 40-year-old photographer in Beijing and the head of a citywide club for owners of the Model 3 and Model Y, is one of them. The current criticism "may have reminded the company that they should do better on things like customer care, which is a good thing," Yang said in an interview. But in the long run, he's still a believer.

"Tesla," Yang said, "will transform the automotive industry in 10 years. It's going to be a giant."

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)