Tesla Showrooms In China Are Undergoing Internal Review

Tesla delivered a near record number of China-made cars in August — 76,965 in total. The Tesla brand continues to hold great allure for consumers in the country, which accounted for the largest number of global vehicle sales in 2021 — 26 million units. Since opening its first store in central Beijing in 2013, the all-electric car company now has grown to over 200 Tesla showrooms across the country.

But are all those Tesla showrooms well-placed? That’s what the company is now deciding.

Ah, to enter a Tesla showroom in urban China is to walk into a contemporary space with diffused light and clean lines. Parallel rows of small white ceiling lights mirror in the deep blue exterior of a Model 3. On one wall is a long, well-lit photo of the Model S, set against high skies and rolling hills. Another photo display features a Model X at sunset set from road level, with piercing orange rays that embrace the car as it whisks along an empty curving road.

Peeking out the showroom window, one sees the city street and flashes of buses and pedestrians, low thick buildings, and landscaped deep green shrub gardens. An exterior wall video screen plays a film of the car assembly in action; before it are 3 equally spaced Teslas: a white Model X, a red Model 3, and a blue Model S.

Since delivering its first electric car to a Chinese customer 8 years ago, Tesla has viewed the country as a key market for sales and a base for manufacturing. Tesla’s second-largest market of its entire global sales is in China, only exceeded by the US. The Tesla showroom approach has worked well in urban China — at least until waves of Covid suppressed walking traffic in upscale shopping centers.

Covid & the Tesla Showroom Marketing Model

Always seen as having a slightly different approach to marketing, Tesla has skirted the traditional auto manufacturer dealer model and has created a direct distribution channel from manufacturer to consumer. Through Tesla showrooms, potential consumers can touch an appealing model and have customer service reps arrange test drives. While Tesla showrooms offer a tangible buying experience, the majority of information is located on the company website, which functions to communicate and be a human-less buying portal.

Every automaker in China was impacted by the coronavirus epidemic, as it was difficult to carry out offline listing activities such as test drives, auto shows, or press conferences. Fears of mass Covid contagions prompted Chinese officials to initiate several lockdowns, including in Shanghai, where Tesla’s Gigafactory is located. This was Tesla’s first Gigafactory outside the US, constructed in 2019 in less than 6 months, and Giga Shanghai was the first automobile factory in China fully owned by a foreign company. In January 2020, Tesla donated the equivalent of $723,000 to the Chinese Center for Disease Control and Prevention to fight the Covid pandemic in mainland China.

Reuters reported this week that Tesla is considering closing showrooms in flashy malls in cities like Beijing. Covid restrictions have really hampered consumer traffic in those areas, but not in the country as a whole. The thinking is that Tesla would maintain a couple of urban downtown showrooms to promote brand positioning.

Rather than conceding that the Chinese market has faded, it seems that Tesla has realized that moving to suburban areas where it can also provide maintenance services might be the most prudent decision. More than half of the existing stores in China do not offer maintenance service due to the high-priced real estate in which they are housed.

EV Sales in China

The increased variety and affordability of EVs models, higher gas prices, a ramp-up in production from OEMs, improved range, and more charging stations have all contributed to increased sales of EVs in the last year.

Electric and hybrid cars have been very successful in recent years in China, thanks in particular to the support of the Chinese government, but also because buying an EV avoids the cost of purchasing a license plate, which is a considerable saving. Furethr, with China’s production back on track after the Covid shutdowns, it seems sales have recovered their previous growth pace.

After a scheduled upgrade disrupted most production in July, Tesla ramped up output at the Shanghai plant in August, defying heatwaves and Covid curbs that hit its suppliers in the southwest region. By the end of August, Tesla had sold around 400,000 Model 3s and Model Ys made at the Gigafactory Shanghai in 2022. Of those, 60% were local sales, according to the China Passenger Car Association.

BYD is the largest selling EV brand in China. Due to its various plants in country, the company has a competitive advantage to integrate all of the key components in-house. Moreover, with the help of subsidies, BYD has been able to build economies of scale, pushing down its cost per unit and allowing it to spend more on research and development.

Tesla is keenly aware of BYD’s successes in the China EV market but is always seeking its own inroads.

Enhancing Service Operations in Conjunction with Tesla Showrooms

Stores in suburban locations would be less overhead cost for Tesla, and they would be well situated to provide repairs. That duality of purpose signals increased Tesla respect for consumer confidence in sales as well as service.

The company says it designs every Tesla vehicle with the goal of eliminating the need for service. Paired with remote diagnostics and over-the-air software updates that regularly improve the car, the goal is for Tesla owners to spend less time in the shop and more time on the road.

But displeasure with Tesla erupted in China last year when regulators and state media took notice after a disgruntled customer’s complaint at the Shanghai auto show went viral. An unhappy customer climbed on top of a Tesla at the auto show in protest over the company’s handling of her complaints about malfunctioning brakes, triggering a social media storm. While Tesla issued a brief apology, China’s market regulator urged Tesla to ensure product quality in the country, while the official Xinhua news agency complicated matters by insisting that Tesla’s apology was “not sincere.”

As a result, Tesla CEO Elon Musk set a goal of improving service for existing customers, many of whom have complained of long delays.

Of course, car repairs have always been a lucrative component of the automotive industry, and Tesla is constantly looking for ways to increase its profitability.

Notably, for those suburban Tesla showrooms to open, the company would require more staffing. Its website currently displays 300 openings for service jobs in China.

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