Elon Musk’s visit underscores China’s importance to global EV market, analysts say

From handshakes with Chinese officials to visits to China’s top ministries, Elon Musk’s visit to Beijing is putting the spotlight on China’s place in the global electric vehicle market.

The Tesla CEO’s visit to China is a “very important one” for him, said Anthony Sassine, senior investment strategist at investment manager Kraneshares.

China accounts for 50% of Tesla’s vehicle sales and 20% of its production capacity, and this visit would “set the story straight, to make sure he was on the same page as the [Chinese Communist Party],” Sassine told CNBC’s “Street Signs Asia.”

During Tesla’s earnings call in April, Musk identified U.S.-China tensions as a risk to the company’s projections for 2023.

Sassine said the visit could also be seen as a “political statement” to China, where business leaders like Musk and JPMorgan chief Jamie Dimon are “telling politicians on both sides of the Pacific that business needs political stability.”

Politics is not the only reason. Sassine pointed out that the macro environment for EVs in China has been “tough,” and highlighted China’s ending of subsidies on new EV purchases, as well as rising interest rates in the U.S.

In the face of such conditions, companies have slashed prices to boost sales, and this will hurt their profits, he said.

Tesla slashed prices for its EV sales in China last October and January, but subsequently raised prices again in May. Still, the price of Tesla’s cars remains lower than at the start of 2023 due to several rounds of price cuts across the world.

The fact that Tesla was forced to slash prices in the first place shows how important the China market is to the U.S. electric carmaker, said Bill Russo, founder and CEO of strategy and investment advisory firm Automobility.

“It signals how important the China market is to defend and how important it is to your global system, you need the scale of China working for you,” he said on CNBC’s “Squawk Box Asia.”

Russo said Tesla needs the economies of scale that China provides to maintain its cost advantage globally, “but in order to sustain that, you need to make sure that you maintain your relevance here.”

It won’t be easy for Tesla, however. He noted that China the most competitive market for EVs, with Tesla competing with multiple local companies for supremacy. “Tesla is, unlike other places in the world, not the only top dog in this market,” he added.

When asked if Tesla’s strategy of cutting prices is appropriate, Russo said Tesla is “fighting with an older portfolio” — Model 3 was launched three years ago and Model Y two years ago.

As such, it has had to use price to compete against Chinese EV companies that are introducing new models and to counter the aging of its product portfolio.

Russo pointed out that Chinese EV maker BYD sells extended range hybrids. This is “a weapon that Tesla doesn’t have,” he said adding that BYD also outsells Tesla two to one in the pure battery electric business.

As such, Tesla has to rely on pricing to maintain its competitiveness, unlike other places around the world where it doesn’t face such stiff competition.

“The problem is Tesla everywhere else in the world represents ‘premium EV,’ but in order to fight the battle here in China, you’ve got to wage a price war,” he said.

“Generally price wars are won by companies who can outprice you and right now Tesla is not the lowest price competitor in the market.”