Tesla's easy ride in China may be coming to an end

Tesla boss Elon Musk (L) walks with Shanghai Mayor Ying Yong during the ground-breaking ceremony for a Tesla factory in Shanghai on January 7, 2019. STR via Getty Images

• Tesla is facing an uphill battle in China, the world’s largest auto market. 
• The EV ecosystem Tesla built may help catapult that competition to success.
• Elon Musk appears focused on reinforcing Tesla’s China business.

Tesla is facing tougher years ahead in the Chinese market, and it couldn’t come at a worse time for the company.

Elon Musk’s automaker has enjoyed many years of favorable treatment from the Chinese government. When Tesla started building cars at the Shanghai Gigafactory in 2019, it was the first foreign automaker to wholly own its production facility.

The Chinese government also provided Tesla with loans, tax benefits, and subsidies in return for a boon to the local supply base as Tesla worked with companies to source new, lower-cost materials and components.

Creating this ecosystem around the Shanghai factory changed the way electric cars were built in the world’s largest auto market and may have sown the seeds for the intense competition Musk now faces in the region.

After years of steady growth in China, Tesla’s sales are slipping

Tesla sold 62,167 cars in China in April, down 18% from a year ago, according to data released Tuesday by the China Passenger Car Association.

Local rival BYD, a former battery supplier that has its own mighty hold on the EV supply chain, is now outselling Musk’s company, delivering 145,576 of its lower-cost battery-electric vehicles in April.

Now Tesla has to fight with domestic competitors

China fueled Tesla’s explosive growth over the past five years, making it the most valuable automaker in the world and a leading seller of electric vehicles. But in the meantime Tesla has played into China’s hand, teaching its local supply base how to build better EVs and scale up to mass produce them.

Now, Tesla will have to face home-grown competitors who will benefit from the same EV ecosystem that it helped to build, potentially sowing the seeds of its own downfall in the region.

This strategy of luring an industry leader to the region with favorable treatment to spur innovation for the rest of the sector isn’t new for the Chinese government.

Take Apple, for example. China provided the California tech company’s iPhone manufacturer, Foxconn, with mountains of economic incentives and tax breaks. Today, a majority of Apple’s most popular products are manufactured in China, putting the country at the center of the smartphone manufacturing ecosystem.

Tesla sends in reinforcements

Challenges in China couldn’t come at a worse time for Tesla. Musk has tried to keep pace with BYD by lowering prices in China for the past year, but the company is running out of leeway on pricing as a global EV slowdown is finally catching up to Tesla.

Inexpensive Chinese cars are also competing with Tesla in important European and Scandinavian markets, a traditional stronghold for Musk. And while they aren’t for sale in the US, BYD’s Dolphin Mini goes for just $21,000 in Mexico compared to Tesla’s cheapest Model 3, which is down to about $39,000 these days.

Meanwhile, in Tesla’s native US market, similar price cuts are losing their luster as traditional competitors like Ford and GM are able to fall back on gas-powered profits and a newfound interest in hybrid vehicles, which Tesla doesn’t build.

After his latest visit to the region, Musk appears to be sending reinforcements to the Chinese market. Tom Zhu, one of Musk’s most trusted executives and the architect of Tesla’s success in Shanghai, is headed back to the region as the company also looks to roll out its Full Self-Driving software.

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