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USA vs China. Who will Win the Electric Car War? Will China's Electric Car Startups Sink Tesla?

by James Murdock
Tesla vs China's electric cars
Tesla, the cutting-edge electric car company founded and led by tech billionaire Elon Musk, has never failed to grab the public's attention and keep consumers around the world waiting to see what it comes up with next. As the world's most prominent electric vehicle start-up, Tesla excites automobile enthusiasts, tech lovers, environmentalists and futurists alike.
tesla electric car

Over the past two years, Tesla's efforts have culminated in the release of the Model 3, billed as the world's first mass-produced, affordable electric vehicle.

However, as Tesla works to bring the Model 3 to mass production, new start-ups hope to compete with it and gain their share of the quickly growing market for electric cars.

Many of the most prominent companies that are emerging to give Tesla a run for its money come not from the United States, but from China. The East Asian country, the most populous in the world, hosts the largest consumer automobile market on Earth. As such, Chinese startups have the capacity to compete not only with Tesla in their home nation, but also potentially on a global scale.

Here's what you should know about the current state of Tesla and the group of enterprising young automakers that hope to dethrone it as the king of electric vehicles.

Why Tesla is the Brand to Beat

During its relatively short life, Tesla has managed to become one of the most valuable automobile manufacturers in the world by market capitalization. Of the automakers of its size, it is also the only one that is exclusively invested in making electric vehicles.

US Electric vehicle Sales Volume Chart

As a result, Tesla is extremely well-positioned to take advantage of a growing demand for electric cars. In the United States, sales of electric cars have increased 30-40 percent annually over the last five years. With similar growth trends in Europe, Tesla hopes to be able to scoop up a large share of automobile sales in coming years by being the go-to manufacturer of electric vehicles.

Despite Tesla's difficulties with the Model 3 (see below), the company has also posted some major successes with its two other most recent offerings, the Model S and Model X. The Model S, a luxury sport sedan whose electric motor can produce up to 691 horsepower, was named the Consumer Reports best overall vehicle in both 2014 and 2015. The Model X SUV, similarly, won the AAA's 2016 Green Vehicle award.

Tesla's Vulnerabilities

Despite being far and away the most well-known name in the electric car niche, Tesla has its share of problems that make it vulnerable to rivals. The most pressing of these problems is the company's historic difficulties in meeting production and delivery quotas.

Electric Vehicle Production Woes

In July of 2017, Mr. Musk announced on Twitter that the company's production of the Tesla Model 3 could reach 20,000 per month by December. In reality, production fell considerably short of that goal, with just 2,425 Model 3s manufactured during the entire fourth quarter. Until at least September of 2017, Tesla's employees were even assembling cars by hand due to a lack of automated assembly technology in the company's factory.

The aforementioned low production rates have also led to increasing wait times for customers who want to purchase Tesla vehicles. With well over 400,000 reservations and counting for the Model 3, the company's existing production obligations far exceed what it has been able to accommodate thus far.

The result has been wait times that can exceed a year, though actual future waiting periods are heavily dependent on when and to what degree Tesla can achieve mass production.

In addition to production challenges and extremely long customer waiting periods, Tesla is also facing its share of financial difficulties. Recent estimates show that the company loses roughly half a million dollars every hour, resulting in massive annual losses.

Without an influx of new capital, those losses could exhaust Tesla's current cash reserves before the end of 2018. Though Elon Musk and Tesla have never found it difficult to attract investors, the need to find money to stay afloat after such a volatile period introduces yet another hurdle to Tesla's long-term success.

More concerning still, this lack of profitability isn't likely to end anytime soon; independent analysts estimate that Tesla won't be in the black until 2020 at the earliest.

While these problems on their own aren't enough to spell the end of Tesla, they do make it quite vulnerable to competitors. Chevrolet's Bolt, a competing electric car that's already in production, managed to considerably outpace Tesla's Model S, Model X and Model 3 in terms of delivery in the last two quarters of 2017.

Nissan's Leaf is also in its earliest stages of delivery and could challenge the Model 3 in coming years. Both of these threats to Tesla's dominance, though, may be small in comparison to the disruption that could be brought to the market by Chinese electric car companies.

Why Chinese Start-ups Could be Tesla's Biggest Challenge

The single most important reason that Tesla's main competition may come from China rather than traditional auto majors is the fact that China's government recently announced steps to push the country's automotive production strongly toward electric cars.

By 2019, at least 10 percent of new car sales in China will be required to be of electric vehicles. While most automotive companies must operate at a consistent profit and offer models in accordance with consumer demand, China's command-based economy is one of very few that can almost completely circumvent these basic market requirements.

This means that Chinese automakers may be heavily incentivized to manufacture electric vehicles at massive scale while at the same time evading some of the troubles that have plagued Tesla.

Chinese companies are also experienced in producing electric cars geared toward inexpensive consumer production, potentially bringing them into direct competition with Tesla's Model 3.

Relative Pricing for Electric Cars in the USA

The Chery eQ, which is made in China, sells for less than $9,000 once existing government subsidies are applied to its price. Though these subsidies aren't available outside of China, the extremely low price of such electric vehicles already makes it difficult for Tesla to compete effectively in the Chinese market.

The final component that makes Chinese start-ups the largest potential threat to Tesla is technical, rather than purely economic. All electric car batteries use lithium ion technology in order to hold a greater charge than traditional nickel-cadmium or lead acid batteries are capable of.

Because of this fact, lithium resources are of the utmost importance to the burgeoning electric car industry. Recently, Chinese companies have been aggressively investing in lithium mining projects around the world, likely to compensate for the fact that the Asian nation itself has insufficient lithium reserves for the government's plans for widespread electric vehicle adoption.

This growing control of lithium reserves may give Chinese electric car companies wider access than Tesla as it progresses.

The Competitors: The Top Chinese Electric Car Start-ups That Can Rival Tesla

There are many start-ups creating electric cars in China at the moment, and it is likely that more will emerge in the coming years.

Nio Electric Car

Among the most viable as competitors to Tesla is Nio, a company that only recently debuted its first production automobile, known as the ES8. Though still in a very early phase of its life as a company, Nio shows promise as a direct competitor to Tesla. Like other Chinese manufacturers, the company's vehicles are priced substantially lower than comparable ones made by Tesla.

Like Tesla, though, Nio's ES8 is a luxury vehicle, setting it apart from the more stripped-down vehicles that are often sold in the Chinese marketplace. Nio is also the company that may be best equipped to compete with Tesla financially, having recently secured $1 billion in new funding from investors.

Also in the class of potential competitors to Tesla is Xpeng, which recently unveiled an electric SUV known as the G3. The major selling point of the G3 is its potential ability to adapt to self-driving technology later on down the line.

Peng Electric SUV

The SUV is equipped with an array of cameras that, at present, are used for assisted parking and other basic safety purposes. Xpeng, however, has designed the vehicle to be able to accept future software updates that may one day include a full self-driving system.

As of late January, Xpeng had secured $348 million in new funding. The G3 is expected to be available for the Chinese market before the end of 2018.

Though Nio and Xpeng are both slated to compete with Tesla in the Chinese market, another Chinese start-up may even be able to challenge Elon Musk's electric car company in the international marketplace.

Byton Electric SUV

This company, called Byton, is based in China, but headed by Carsten Brietfeld, who was once part of BMW's executive team. Byton's first electric vehicle, a concept SUV, was one of the major attractions of the 2018 Consumer Electronics Show and is scheduled to go into production sometime in 2019.

This SUV distinguishes itself from Tesla and its other competitors by use of a vast range of different technologies. From facial recognition software used to unlock the doors to 5g internet connectivity, Byton's concept SUV is touted as the vehicle of the future.

Byton is also one of only a few Chinese electric car companies that plans to aggressively compete with Tesla outside of the heavily protected Chinese market. Though the company's production facility is based in Nanjing and it plans to target Chinese buyers initially, it also has ambitions of branching out into both the United States and Europe--markets in which cars from Chinese brands rarely appear.

If all goes according to Byton's plan, the company's cars could be available outside of China as early as 2020.

The Path Forward for Ambitious Chinese Automakers

Although Nio, Xpeng and Byton are all very promising companies, they face a long road to being able to beat Tesla for market share in the electric car space. Tesla has been a publicly traded company for seven full years, and is still facing an uphill battle toward full-scale production and profitability.

To catch up to Tesla, Chinese firms will have to invest in more rapid manufacturing growth to avoid the pitfalls that Tesla has encountered with the Model 3.

One of the considerations that Xpeng, Nio and Byton must face that Tesla did not in its early days is competition within their internal market.

While Elon Musk built up Tesla, there was no other vehicle company in the world quite like it. Now, Chinese startups will have to compete not only with Tesla, but also with each other.

However, thanks to the size of the Chinese auto market and the government's major push toward electric vehicles, there is likely room for several start-ups to succeed in China.

Did Tesla Create its Own Competition?

Open Source Teck

One of the most intriguing elements of the rise of new Chinese electric car manufacturers is the fact that, in part, they have been made possible by Tesla itself. Since 2014, the company has made all of its patents open-source, meaning that other individuals and companies are free to use or improve upon them.

This open-sourcing was done as part of the company's commitment to the rapid adoption and improvement of sustainable energy technologies.

Elon Musk hinted as early as 2015 that he believed several companies were using Tesla's technology as a result. More recently, though, it was revealed that Xpeng was using Tesla battery technology to power its electric vehicles.

Whether other Chinese start-ups are doing the same is yet unknown, but there is at least a good chance that many of them have taken inspiration from Tesla technology that would, under more normal circumstances, be staunchly protected by patent law.

The Future of Tesla

Despite some grim views for Tesla's future, the company continues to move forward with new and ambitious projects that it hopes will put it ahead of any competition that may emerge. Looking beyond the Model 3, Elon Musk hopes to revive the Tesla Roadster in a new and better form.

In fact, the new Roadster is being touted as the fastest production car ever made, a claim that, if true, could help to convert muscle and sports car enthusiasts who have up to now been skeptical of Tesla.

Tesla Roadster

Though an official top speed has yet to be released, Mr. Musk has explicitly stated that the new Roadster is capable of achieving speeds in excess of 250 miles per hour. With a sticker price starting at $200,000, the new Roadster may also act as an alternative to even more expensive supercars.

Also on Tesla's near-term project board is the launch of a set of fully electric semi trucks. Known simply as the Tesla Semi, the trucks have an estimated range of 500 miles on a full battery charge and include an autopilot system based on that of Tesla's consumer production cars.

Thanks to the low cost of recharging and maintenance, the Tesla Semi could be a considerable money saving tool for trucking companies. The trucks have already attracted interest from one of America's largest shippers, UPS, which reserved 125 units of the Tesla Semi shortly after its debut.

Unlike its Chinese competitors, Tesla also has visions for diversifying beyond the automobile industry. American hardware giant Home Depot recently announced a partnership with Tesla for the sale of solar panels and Powerwall battery systems in some 800 stores throughout the country.

Tesla also recently completed an agreement with the state government of South Australia to install similar systems on 50,000 homes there between now and 2022.

Will Tesla Fall to Chinese Competition?

Even with so many likely competitors emerging in China, Tesla shouldn't be discounted just yet. Its large backlog of reserved vehicles gives it a considerable source of future capital as production of the Model 3 continues to accelerate, and customers have so far been willing to accept delivery delays.

The company also enjoys widespread name recognition in the American and European markets, as well as a favorable reputation among younger consumers. By comparison, Tesla's Chinese competitors are starting from a position of virtually nonexistent American name recognition and will likely face many of the same hurdles in scaling up production that Tesla is already in the process of solving.

A more likely scenario than the fall of Tesla is an environment in which it shares market dominance, particularly inside of China, with other companies.

Thanks to its protected market, Tesla is unlikely to ever be as successful in China as its competitors that are based there. Globally, however, there is still very much a place for Tesla automobiles in the electric car niche.

With only Byton immediately planning to challenge it in the US and Europe, Tesla will likely retain a large share of these critical markets. Between a strong head start on these Chinese competitors and a business model that is rapidly expanding into more specialized and even non-automotive fields, it's unlikely that Tesla will be displaced anytime in the immediate future.