Tesla's China Market Share Drops 7% as Local Rivals Gain Ground

Tesla's market share in China has significantly declined, dropping to 4% from 11% in early 2021. This shift is evident in the sales figures, which show a 30% year-over-year decrease in May, with just under 40,000 Teslas sold compared to over 57,000 during the same period last year. This decline comes as overall electric vehicle (EV) demand in China continues to rise, with domestic brands like BYD and Xiaomi gaining traction. BYD, in particular, now controls 29% of the EV and plug-in hybrid market, highlighting the growing competition Tesla faces in the region.

Tesla's challenges in China are multifaceted. The company's once-favorable treatment by Chinese officials, which included land, tax breaks, loans, and the rare right to build a factory without a local partner, has waned. Tesla is now falling behind the very competition it helped build. Chinese brands are offering features that Tesla does not, such as multiple screens, in-car gaming, selfie cams, and fridges, which local buyers find appealing. The brand is perceived as tired, and Tesla's team in China has struggled to convey local customer demands to headquarters. Despite repeated requests for new features, more smartphone integration, and native apps, Tesla's U.S. officials have not prioritized these integrations. The company later added Mango TV but still lags behind domestic rivals in app offerings.

Tesla's sales staff in China are under increasing pressure. A salesman in Beijing reported that his sales target jumped from four cars a week to one a day, with daily working hours extended from 10 to 12. The aging models and improving local competition have left sales staff with less to pitch. Tesla's plan to build a car tailored to Chinese tastes was scrapped, and instead, the company chose to strip features and roll out a cheaper Model Y variant. This model starts at $36,700, while BYD’s Sealion 07 starts at $26,400, making it a less competitive option.

Elon Musk's relationship with Beijing has also deteriorated. In January, he met with Vice President Han Zheng in Washington, who reportedly expressed China's hope that Elon would help with U.S.-China relations. However, Elon did not engage, leading officials to view him as less useful as a bridge between the countries. Additionally, Tesla faces regulatory hurdles in rolling out its Full Self-Driving (FSD) system in China. The software, which relies on AI trained from American driving data, is not compliant with Chinese regulations that require systems to be trained locally. Tesla's attempts to address these issues, including offering to redact sensitive video and moving FSD training to China, have failed due to U.S. export controls on necessary chips.

While Tesla was navigating these challenges, Chinese firms made significant advancements. XPeng’s XNGP and BYD’s Eyes of God launched with FSD-style capabilities, and Baidu and Pony AI already operate robotaxi fleets. Tesla's attempts to introduce FSD features through over-the-air updates were shut down by regulators, who clarified the rules and blocked a free one-month trial offered by Tesla. Regulators stated that Tesla "shouldn’t use drivers as guinea pigs."

Tesla's problems extend beyond cars. In March, the company began shipping Megapack batteries to Australia from its new Shanghai factory, but battery giant CATL is already deeply entrenched in that market. Tesla's humanoid robots, built in the U.S., use Chinese parts, and despite new U.S. tariffs, Tesla continued buying from its suppliers to slash costs. However, local startups like Unitree and Agibot are now working with the same suppliers, potentially putting Tesla in a similar competitive position with robots as it is with EVs. During a call with analysts, Elon Musk expressed concern that "on the leaderboard, ranks two through 10 will be Chinese companies."