[Adam Minter] Tesla doesn’t need to sell cars in China to succeed there

By Bloomberg
  • Published : Jan 21, 2019 - 17:12
  • Updated : Jan 21, 2019 - 17:12

When Elon Musk broke ground on Tesla’s Gigafactory in Shanghai earlier this month, he wasn’t just thinking about how many Teslas he’ll sell in China. He was thinking about how many he might be able to share.

Musk isn’t alone. Global automobile manufacturers are scrambling to develop services that will allow Chinese car owners to rent out their vehicles when they’re not driving them. According to one recent analysis, such services could hire out as many as 2 million cars in 2020, up from roughly 100,000 in 2017.

Over the last four decades, rising incomes and a booming domestic car industry have flooded Chinese roads with automobiles, contributing to massive air-pollution problems, world-class traffic jams, a city-destroying parking crisis and the loss of livable, pedestrian-friendly neighborhoods. Worried authorities have invested heavily in mass transit to reduce the number of cars on the road. They’ve also created barriers to automobile ownership, as well as use.

At least initially, ride-hailing was viewed as another potential solution. But, in China, it turns out that ride-hailing draws people away from mass transit, biking and walking, and into a growing fleet of cars that may actually worsen traffic and pollution.

The first modern Chinese car-sharing company, CC Clubs, was launched in Hangzhou in 2010. It initially had 30 cars and 13 drop-off/pickup points located at major centers of employment and residential developments. Three factors have contributed to its growth since then. First, Chinese consumers, wary of high auto prices and traffic-choked streets, are increasingly willing to forgo car ownership altogether. Second, CC Clubs and other car-sharing services are mobile-first businesses that allow consumers to rent cars with apps no more complicated than Uber’s.

Most importantly, those businesses now rely almost exclusively on rechargeable electric vehicles. The Chinese government heavily subsidizes the production and sales of electric vehicles, both to reduce pollution and to seize the lead in the next wave of auto manufacturing. That lowers the cost of operating an electric car share and -- even as authorities restrict the number of new internal-combustion vehicles on the roads of China’s biggest cities -- makes it possible for car-sharing companies to deploy large fleets.

Worried about a potential long-term decline in Chinese car sales, global automakers are thus launching their own car-sharing services or partnering with existing ones. For example, last April, Didi Chuxing, China’s largest ride-hailing company, formed an alliance of global auto companies to design and build electric vehicles designed for car-sharing. Among the members are Volkswagen and Toyota Motor. Meanwhile, Lynk, a joint venture between Volvo Cars and Geely Automobile Holdings, recently launched a car-sharing feature in its new models. An owner simply notifies a dedicated network that the car is available for rent, and anyone with a Lynk smartphone app can then rent, open and start it up.

The real revolution will arrive in a few years, when self-driving cars hit China’s roads. At that point, transportation will become truly on-demand: A renter will merely need to notify a car of his or her location, and the vehicle will race over.

This isn’t science fiction. In 2016, Elon Musk wrote that once regulators approved self-driving cars, owners would only need to “tap a button on the Tesla phone app” to send their cars off to generate income “potentially exceeding the monthly loan or lease cost.” He estimated the feature could arrive as early as the end of 2019. Tesla also intends to operate its own network of driverless cars, taking a cut of each ride that could be as high as 30 percent, in line with current ride-sharing practices.

That could help reduce the pressure Tesla feels to sell its cars. Instead, the company will only need to deploy them to generate revenue. In October, Musk said that the plan is to have a company-owned fleet operating in places where there simply aren’t enough customer cars to be rented out. He’s focused initially on challenging the likes of Lyft and Uber in the US.

In China, Tesla and others will have to compete against cheap taxi fares and abundant public transit. The Chinese car-sharing business is also brutally competitive, and it’s far from clear that the government would tolerate a foreign company dominating the market. Still, with the transition to autonomous electric vehicles already underway on the mainland, China obviously holds great potential for Tesla’s model. Already, the country’s ride-hailing market is bigger than the rest of the world’s combined; the car-sharing market should follow that lead. Musk’s trip to Shanghai isn’t likely to be his last.

Adam Minter
Adam Minter is a Bloomberg Opinion columnist. -- Ed.