On April 18, in a crowded showroom at the 2021 Shanghai Auto Show, a 32-year-old woman from Henan province named Zhang Yazhou climbed onto the roof of a raspberry-red Tesla Model 3 and began to scream. As onlookers turned their attention from the glitzy new cars, Zhang made an accusation that no automaker wants trumpeted: “Tesla’s brakes are not working! Tesla’s brakes are not working!” Her t-shirt and that of another woman standing nearby repeated the claim, which referred to a near-fatal accident Zhang and her father suffered in a Model 3 in February.

Video of the incident flared across the Chinese internet. Soon it was international news. “Protesters upstage Tesla at China’s top auto show,” said CNN. Although Tesla quickly framed the incident as nothing more than a single act of lunacy, many observers declared it the inevitable first crack in Tesla’s China dominance. “Tesla’s China honeymoon appears to be coming to an end,” wrote a Bloomberg reporter.  

And it has been quite the honeymoon. Since its first made-in-China cars came off the assembly line in late 2019, Tesla has succeeded rapidly in the country’s electric vehicle (EV) market, accounting for the majority of EV sales in 2020.¹See this Bloomberg Businessweek article on Tesla here. Enticed by a valuable suite of tax breaks, subsidies, loans and lightning-fast permits for their $2 billion Shanghai “Gigafactory,” Tesla has enjoyed the warm glow of Beijing’s approval — a rare status for an American company. CEO Elon Musk has been feted by Chinese high society — including sharing tea with Premier Li Keqiang — and he is adored by Chinese consumers, who have dubbed him the “Silicon Valley Iron Man.”

Tesla has returned the love, seeing in China its dream market: the world’s biggest and fastest growing consumer EV pool, which is buoyed by a government dead set on electrifying its transportation system. China represented 41 percent of global EV sales in 2020; America just 2.4 percent. Indeed, much of Tesla’s nearly $700 billion stock market valuation is based on it prevailing in the Chinese market. In 2020, Tesla’s China sales more than doubled to $6.7 billion, according to February filings, constituting nearly a quarter of the firm’s global sales.

“It is impossible to overstate how important China is to Tesla’s global success,” says Michael Dunne, a longtime consultant in the Asian auto industry who runs ZoZoGo. “China will — if not this year, in the next couple of years — become the largest production center for Tesla. In some sense, the center of gravity for Tesla, globally, is becoming China.” 

China’s goals for self-sufficiency — and, eventually, global prestige — in EVs are no secret. For the past decade, Beijing has carefully and strategically planned to use EVs to leapfrog traditional combustion engines, a technology it never had much success with, and it would surely prefer to see its domestic start-up brands, such as Nio and Xpeng, prevail over the firebrand from Fremont. For the past few years then, observers have watched the China-Tesla love affair with a certain sense of foreboding: how much longer will Beijing allow Tesla to reign supreme?

“It’s like the smartphone market in China all over again,” says Yunshi Wang, a transportation economist at UC-Davis. “First foreigners came, then there were Chinese makers, and then the Chinese makers overtook the foreigners. Tesla is the same thing.”

The first months of 2021 looked like they might mark the turning point in this familiar story. In February, after two recalls and performance malfunctions, the company received a warning from regulators to abide by Chinese laws and improve its quality kinks.²Such complaints are common for Tesla in the U.S. too, according to J.D. Power, which ranked the company last out of 32 brands in a 2020 quality study. Then, in March, China restricted military officials and some state employees from driving Musk’s machines for fear that onboard cameras might facilitate American spying. “There’s a very strong incentive for us to be very confidential with any information,” Musk assured — to no effect. 

By April, the Auto Show kerfuffle seemed like a fitting end to a disastrous Q1. Though Zhang blamed the brakes for her and her father’s accident, Tesla cited “speeding violations” and suggested that Zhang was fishing for undue compensation. Tesla China’s vice president Grace Tao, a former CCTV anchor, went further in an interview with a Chinese news site when she insinuated that Zhang’s protest was staged by a third party.

The public backlash was fast and furious. Netizens ridiculed the company’s patronizing response, and state media flipped on the soakers. “The arrogant and overbearing stance the company exhibited in front of the public is repugnant and unacceptable, which could inflict serious damage on its reputation and customer base in the Chinese market,” sneered the Global Times. In a WeChat post, the Central Committee of Political and Legal Affairs, a powerful state body, stepped into the ring: “It is the trust of Chinese consumers that has opened the door to Tesla… But trust cannot be exchanged for arrogance and lack of respect for the Chinese market and consumers.” 

Under the blows, Tesla softened its tone, apologizing for “failing to resolve the problem of the car owner in time.” They also requested to have Tao’s contentious interview taken offline, the news site reported on WeChat. 

But, despite the panicked headlines and reputational bruising, the Tesla-China love affair isn’t winding down just yet. The brand continues to thrive in China: the Model 3, a mid-sized sedan, is still the best-selling luxury EV in the country, and Tesla is on pace to sell 300,000 cars  in China this year — about 40 percent of its global output. 

“Their sales are on autopilot until 2023,” says Dalibor Petkovic, an independent industry analyst.

Tesla’s real reckoning with China, experts say, is still a few years out. And when it comes, it won’t play out as publicly as Zhang’s auto show stunt or on the front pages of newspapers. Instead, there will be unavoidable clashes behind the scenes with government regulators as EVs head into their next, data-heavy phase of development: autonomous driving. 

“Once we get to the autonomous driving angle, it’s going to be much more tricky for Tesla,” says Edison Yu, an analyst at Deutsche Bank. “Maybe they find a way to coexist with the regulatory bodies. It’s not impossible. But it’s going to be much less straightforward than just selling EVs.” 

A RISING TIDE

Elon Musk has long endeavored to be in Beijing’s good graces. As early as 2012, when asked if he worried about the ethical implications of operating in a one-party state, he was prepared with positive talking points: “My experience with the government of China is that they actually are very responsive to the people — in fact, possibly more responsive to the happiness of people than in the United States.”

“If you compare Musk’s relationship with the U.S. government to that with the Chinese government, it’s night and day,” says Tu Le, founder of Sino Auto Insights in Beijing. “He’s learned how important government relations are here in China, whereas he’s always poking people in the eye over there.”³While Musk has had a contentious relationship with the Securities and Exchange Commission, his aerospace company, SpaceX, does work closely with the U.S. government.

Tesla’s pursuit of the Chinese pie was inevitable. Since becoming the world’s largest EV market in 2015, Tesla and its competitors have salivated at the potential there. The breakneck speed at which industry operates was also appealing to the infamously rapacious Musk, who regularly balks at U.S. and European regulators for slowing him down: it took only 10 months to get the Shanghai Gigafactory up and running, compared to the two years to bring the Nevada Gigafactory online.

But what was less inevitable was Beijing’s eagerness to help Tesla. Alongside cash incentives, which included $1.4 billion in favorable loans from state banks, the government allowed Tesla to operate in the country without a Chinese partner, the first foreign automaker granted that independence.

“It really was a head turner for the incumbent OEMs, who were more or less forced to form joint ventures,” says Dunne. The government also moved quickly in letting Tesla set up its supercharging infrastructure throughout China, a critical incentive for potential buyers. 

Beijing has helped Tesla in subtler ways too. In March, after months of damaging consumer complaints, Tesla was reportedly set to be featured on 315, an influential, prime-time CCTV program. On it, brands are named and shamed for poor performance. Starbucks, Apple, and General Motors have all suffered the show’s wrath, alongside Chinese firms. Before airing this year, a reporter for the show posted on Weibo that he had interviewed a man in Nanning involved in a grisly Tesla crash. But when the show came and went without mention of Tesla, some observers assumed the government intervened. 

“This is what the government has been doing for Tesla all this time,” says Petkovic. “They’re constantly watching their back.” 

“They’re almost treated as a Chinese company,” says Le, the Beijing analyst. “And Elon is taking full advantage of that.” 

Why the special treatment? Experts say that from Beijing’s perspective, Tesla is a rising tide that can lift all boats. Afterall, having the best known EV brand in the world operating in China bolsters the image of the Chinese EV industry as a whole while also strengthening and localizing supply chains. And, much as he did in the U.S., Musk’s spaceman mojo has encouraged a devout following among Chinese trendsetters, making EVs in China cool. 

“Your urban educated elite are now saying, ‘I want the Hermes bag, I want the Gucci shoes and I want a Tesla vehicle,’” Dunne says. “For the first time since China started its electric vehicle drive, that triggered genuine, strong private demand for going electric.” 

Indeed, Tesla has excited Chinese consumers and created demand around private EVs in a way the government could not, despite investing nearly $2 billion in EV subsidies between 2009 and 2016. In 2018, before Tesla began its China push, consumer interest in purchasing an EV was 3 percent, according to polling by J.D. Power China. Now, in 2021, it is 16 percent — an all-time high that contributed to China’s sale of 1.3 million EVs in 2020, about 41 percent of the global total (Europe had 42 percent). 

“Other EV brands in China actually have to thank Tesla,” says Lei Xing, editor of the China Auto Review. “Tesla is the company that really got private consumption of EVs taking off.” 

With fresh demand spilling over into domestic EV makers, Beijing also sees Tesla as a useful goad. In China, the “catfish effect” is a well-known strategy of making weaker competitors stronger through the introduction of a fierce competitor. If you can compete with Musk, the thinking goes, you can compete with anyone. 

“The general interpretation is that one of the reasons why the Chinese government wanted Tesla was to raise competition and bring more high quality vehicles onto the market,” says Ilaria Mazzocco, a Chinese energy researcher at the Paulson Institute. 

“It’s a symbiotic relationship,” adds Le. “The Chinese government will let Tesla be the flag bearer for the EV sector for a few years in the hopes that one of these Chinese EV companies can eventually become that domestic flag bearer.” 

Your urban educated elite are now saying, ‘I want the Hermes bag, I want the Gucci shoes and I want a Tesla vehicle.’

Michael Dunne, a longtime consultant in the Asian auto industry

The term “the Tesla of China” gets thrown around a lot in discussions of China’s EV industry. NYSE-listed start-ups such as Xpeng, Nio and Li Auto, as well as more established behemoths like BYD, the world’s largest EV producer, and BAIC Group are marketing increasingly sophisticated models. 

But so far, Nio seems to be the front-runner for the Tesla mantle. Like Tesla, it targets a wealthy consumer with unapologetically luxurious cars while investing heavily in customer loyalty. 

“You have Tesla fans and then you have Nio fans,” says Petkovic. “It’s like watching a football game. They will kill each other over these two brands.”

Nio’s history is also uncannily similar to Tesla’s. Its founder, William Li, is a billionaire tech mogul known for a forward-facing vision and fantastical, outsized ambitions. Like Musk, his EV company had a brush with death before soaring to stock market success; once on the verge of bankruptcy, Nio later boasted a market valuation higher than Ford and GM. The company’s sights are global too, with offices in Germany, England and California and plans to sell in Europe this summer.

“I don’t think of Nio as a Chinese carmaker,” Dunne says. “I think of it as a global carmaker that’s funded and manufactured in China. They’re saying, ‘There’s room enough for more than one Tesla in the world.’” 

Perhaps most importantly, Nio is backed by Baidu and Tencent — two internet giants that can give it a big leg up in software development, which is the secret sauce of autonomous driving systems and the undisputed next phase of EV development.⁴Note: In 2017, Tencent purchased a 5% stake in Tesla. With the help of the internet behemoths, Nio will also arguably have a better grasp of the Chinese regulatory environment, which will play a crucial role in running autonomous vehicle (AV) infrastructure. 

“Foreign companies will move slower in AV technology than Chinese,” says David Zhang, a research fellow at North China University of Technology. “Most of the market will be dominated by Chinese companies by 2030.” 

Indeed, when it comes to Tesla’s potential demise in China, the recent shows of customer dissatisfaction have been dramatic, but they seem to be red herrings. Instead, the daunting mix of powerful competition and bureaucratic pressure borne from China’s coming AV revolution is roaring down the road with brakes, Musk can be sure, that are certain to fail.

THE DISPERSED DATA DISASTER

In March, a fleet of gleaming Xpeng P7 sedans travelled 2,300 miles from Guangzhou to Beijing without any help from a human driver. Xpeng, which is backed by Alibaba, was showing off its LiDAR-equipped⁵LiDAR stands for Light Detection and Ranging, a system that uses a strobing laser to map a physical environment, similar to sonar. AV technology, which allows cars to handle highway driving with virtually no human involvement (though drivers are still required to stay at the wheel). The journey was the longest autonomous driving achievement ever in China,⁶The longest was in the United States, in 2015, by Delphi Automotive. and it was followed up, in April, by Huawei debuting footage of one of its EV brands, Arcfox, navigating a car through busy Shanghai streets using next level AV software — a display of major technological advancement. Taken together, the stunts seemed to solidify a common belief that when the autonomous driving revolution arrives, it will land in China first. The question is, when? 

According to a 2019 McKinsey report, fully autonomous vehicles — to include urban navigation — will see mass deployment in China by 2028 or 2029. Already, in 2020, more than 20 percent of new car sales in China were equipped with some AV functions, such as highway driving.⁷In the U.S., in 2019, that number was 10 percent.

Given the amount of data processing required to make good AV software, it’s no surprise tech companies are jumping into the auto industry. And it’s not just the Chinese giants like Alibaba and Huawei. Google and Apple are investing billions in the field, too. But Tesla, which has been tinkering with self-driving technology since at least 2015, is still the torch bearer for autonomous driving for one simple reason: it has the most cars on the road, which means the most sensors sucking up data to improve its self-driving algorithms.

National Geographic delved into Musk and his Tesla factories in a 50-minute documentary.

For firms vying for AV dominance, data is king. But while Tesla has the most sensors on the roads, its sensors are also the most spread out. Tesla cars, after all, are on roads all over the world, which means the company has to consolidate the data in order to learn from it. This presents a problem in China, which imposes strict limits on taking data outside the country. Just last month, in a move widely seen as being triggered by Tesla,⁸Tesla says it stores all its data locally, but there is speculation the company can still access its Chinese data from the United States. the National Information Security Standardization Technical Committee, a state body, issued a draft rule that outlines new provisions regarding cross-border data management for “smart cars.” 

This week, Tesla said it was developing a platform for Chinese car owners to access data about their own vehicles. The move was seen as both a response to public pressure from the fallout of the Auto Show protest as well as a potential way to placate regulators. But, when it comes to Tesla’s future AV competitiveness in China, observers say the writing is already on the wall. 

“If the Chinese government says you can’t move Chinese user data from Chinese servers to the U.S., then we will have two separate systems essentially,” says Le. “This will be a huge issue for Tesla. If they can’t consolidate their data, then their system isn’t as good. Meanwhile, there are lots of Chinese AV companies in Silicon Valley [who can send their U.S. data back to China]. So, there’s an imbalance that disadvantages Tesla.” 

“It is similar to other tech barriers in China,” says Wang, at UC-Davis. “China has closed its internet to the outside world. So if Tesla wants to be a relevant player in autonomous driving, they’re going to have to follow some of those rules.” 

[Tesla’s] primary focus is in North America. That’s where all the beta versions are coming out. They don’t work in China.

Edison Yu, an analyst at Deutsche Bank

And the data rule could just be the first of many. As autonomous driving advances in China, regulators will continue to play a large role and could insist on a number of constraints. Already, access to high-definition mapping licences is limited to domestic firms, which forced Tesla to partner with Baidu, one of the only firms in China licensed to do that type of advanced mapping. 

“Our research suggests local players alone will have access to most location-based services, leaving foreign companies and joint ventures at a disadvantage,” the McKinsey report says.

Potentially most crushing of all, automakers could be asked to hand over their AV software for review. 

“AV is an example where you’ve got this mingling of personal data and important data — the cameras take pictures of all sorts of things,” says Paul Triolo, who follows Chinese AV policy for the Eurasia Group. “I can see the Chinese government mandating that Tesla has to localize all that data and do all the training of the algorithm locally.” 

Sharing software with the state, however, raises the risk that IP could be stolen and shared with domestic competitors. It also could upset the U.S. government, which may not look too kindly on the company moving elements of its advanced technology to China and might eventually enforce its own restrictions on what sorts of advanced technology can be sold there, added Triolo. 

So far, it seems, Tesla has decided to keep its most precious IP out of China. Though their models in China do offer highway AV technology, their investment and development of full, self-driving cars has remained in the United States — in places like Pittsburgh and California.  

“Their primary focus is in North America,” says Yu. “That’s where all the beta versions are coming out. They don’t work in China.” 

This may weaken Tesla’s competitiveness in China in the long run. But by all accounts, Musk is racing to take advantage of the China market while he still can while also plotting how he can spread his eggs into other baskets. This summer, Tesla is releasing a cheaper version of the hugely popular Model Y, which observers expect to sell like hotcakes in both the U.S. and China. Cheaper models will also allow Tesla to pivot nimbly to emerging EV markets, such as in southeast Asia and India, where a new Gigafactory is already underway. There are even rumors Tesla plans to build a battery cell factory in Indonesia.

“Elon knows that it’s only a matter of time before there are decent competitors in the Chinese market — regardless of his reputation or Tesla’s brand,” says Le. “That’s why he’s moving so fast. He wants to establish himself everywhere so that he can mitigate the reliance on China or the United States only.”

In other words, when the time comes that Beijing no longer needs Tesla, Tesla hopes it may no longer need China.

---