Beijing's campaign to rein in Tesla has begun, now experts say it has a limited time to sell cars before it gets canceled

• Tesla has limited time to get market share in China before the government takes action, experts say.
• State media is indicating that time could run out sooner than Tesla had bargained.
• Experts say it's clear Beijing is trying to give Tesla a bad name so domestic rivals can catch up.

When Tu Le found out what had happened at the Tesla kiosk - just one room over from where he was looking around at the Shanghai Auto Show - he knew he had missed something monumental. It's not every day a woman in a "brakes don't work" T-shirt interrupts the show by jumping on top of a red Model 3 in protest, screaming about Tesla's refusal to fix a brake issue with her car. She was ultimately carried away by security.

Le, the founder of Sino Auto Insights, a newsletter that tracks China's electric-vehicle market, had been following the growing public dissatisfaction with the company for weeks. In an interview with TechNode earlier this month, he dismissed concerns that complaints about the company's customer service and safety bubbling up on social media would slow its sales growth. He reasoned, for all the unhappy customers there are "a ton more" who love Tesla.

But things in China can change fast - especially when the central government decides it's time to shake things up. And in the past few weeks, Beijing - through state-controlled media - has joined the chorus of Tesla critics, and it has the most important and loudest voice of all.

"Xinhua and People's Daily have been publishing opinion pieces regularly saying that Tesla ignores the rights of consumers," Anne Stevenson-Yang, the founder of the investment firm J Capital Research in China, said in an email to Insider. The violations are said to include a right to transparent pricing and to data about accidents.

"Commentators say that Tesla has abrogated its investment commitment (14 billion yuan) and its commitment to pay taxes (2.23 billion yuan annually). The company is not meeting its sales targets," Stevenson-Yang said. She added, "Several commentators have recommended kicking Tesla out, like Google. These are not just your local op-ed writers - it's a campaign."

Le agreed with that assessment and said we should think of this like the Wizard of Oz. Beijing has the power to "dial things up or dial things down" when it comes to public outcry. There are real people upset at Tesla, he said. And the government is choosing to emphasize them even as Tesla sells 30,000 units in the country a month.

"Having social media blow up is one thing," Le said. "When state media gets involved is another thing. This is a clear warning to them."

Tesla needs China. On Monday, Tesla reported a Q1 earnings beat with record profits, but the stock fell down to 4% the following day. That's because those profits were made by selling Bitcoin and a record amount of energy credits to combustion-engine carmakers. As more competition comes online in the US and China in the second half of the year, the market for those credits sales may begin to dry up. Wall Street wants to know how the company will continue to make a profit after that. For the company, winning China has to be part of that equation.

Daniel Ives, an analyst at Wedbush Securities with a $1,000 price target on the stock, wrote that the main line in the sand now for the bulls and bears is "Tesla's ability to further penetrate China."

"With China a linchpin to Tesla's global success and its Giga footprint a key advantage, the latest back and forth between Beijing and Tesla have been a PR black eye with safety issues in the country a hot button issue," Ives wrote. "Now it's about Musk playing nice in the sandbox and making sure that Tesla does not see any stumbles in China, which is poised to represent 40%+ of global deliveries by 2022."

Tesla did not respond to a request for comment for this story.

Accentuate the negative

Chinese netizens have been complaining about Tesla for a variety of things. In 2019, some were angry that the company cut prices shortly after they bought their vehicles. Earlier this month, some were upset about substandard service. Since October, Tesla has been forced to issue two recalls in China, affecting almost 85,000 cars - one for suspension issues, which has also plagued the automaker in the US, and another for touchscreen failure.

In February, when the touchscreen recall was announced, the Global Times, a megaphone for the Chinese government, said, "Tesla has shown respect for the potential of the Chinese market, but not the same level of respect is given to Chinese consumers, analysts pointed out."

In the same month, Chinese regulators met with Tesla - a meeting Le said should have been warning enough.

Since then, a series of videos documenting Tesla accidents and mishaps have gone viral. For example: In March, a video surfaced documenting a strange incident. A Tesla owner's brakes malfunctioned, and when a Tesla technician got to the scene, they were able to reproduce the same malfunction in another Model 3. In April, netizens posted a video of a Tesla catching fire after a deadly crash. Until recently, Tesla has been quiet about these incidents, or in some cases, the company said the driver was at fault. After that first recall in October, Tesla issued a non-apology and blamed "driver abuse" for the problems.

That has seemingly not sat well with Beijing. In the last month or so, commentators in state media have been focused on Tesla's "arrogance." One commentary being passed around on Chinese social-media app Weibo demanded that Tesla hand over data from its vehicles to settle questions about whether the driver or a defect was at fault.

State media started accusing Tesla of arrogance, which only made the situation worse. That is why last week the company apologized for its handling of consumer complaints.

Competition in China

In some ways, Tesla and Beijing are working together. But in others, they are very much at odds. Yes, Beijing welcomes the attention Tesla brings to the electric-vehicle market. But eventually, it's going to want national brands to eclipse Tesla. Le called this "a delicate dance."

Right now, China's electric-vehicle market is dominated by Tesla, SAIC-GM-Wuling Automobile Co. - one of GM's local joint ventures - and BYD. In March, three companies captured 55% of the market, the China Passenger Car Association said. That's only 5% of the total passenger-vehicle market, which gives you a sense of how nascent all of this is.

For now, Beijing needs Tesla to bring attention to the EV market, but Tesla needs to be careful. Le said, "If a domestic EV player steps up, then I think the calculus changes for certain parties."

Last year, Tesla led the EV market in sales. But this year it's getting beaten out for the top spot by the Hongguang Mini, which is made by the SAIC-GM-Wuling Automobile joint venture and costs between $4,000 and $4,5000.

That means Tesla may have to learn to be more responsive to Chinese consumers - and fast. The company is known for its Silicon Valley "growth at all costs" culture. In the US, that has led to complaints of rushed sales and unresponsive service centers, and concerns that build-quality issues go unresolved. In 2020, J.D. Power found that Tesla owners have more issues with their cars than any other brand it studied. Tesla has to figure out how to fix those problems in China.

"Unfortunately," Le said, "you see some of the limitations of the tech mentality in the manufacturing space."

And if Beijing's media campaign works, those limitations could hang around Tesla's neck like an albatross, slowing it's Q2 sales growth so that domestic competitors can catch up.

Bigger than Tesla, bigger than cars

After the incident at the Shanghai Auto Show, Tesla issued an apology to Chinese consumers, but state media has not let up on its critical coverage of the company. The Global Times headline after Tesla's earnings beat was "Tesla 'brakes' in China over image crisis, despite record Q1 earnings."

And then there's this snippet from the report: "Tesla is still betting big on the Chinese market. But its sales in China are doomed to experience a sharp fall in the second quarter and its global sales could also be affected, analysts warned."

If that seems hyperaggressive, that's because it is. Hovering in the background of all of this is the relationship between the West and China, which has soured over the past few years. Recently, Beijing has learned to exercise its anger at foreign governments through their companies, especially over issues such as Xinjiang and Taiwan.

"We're entering a new era in terms of corporate risk in China," said Lee Miller, the founder of the surveyor China Beige Book. "Used to be something where the state media outlets or Communist Youth League would stage an outrage campaign - that's either boycott or social-media hits - a company just had to stage a fulsome apology. We're in a new era where they have a totally different approach."

In this era, the apology isn't enough, and when Beijing shoots at a company, it often shoots to kill. The only way to survive an attack like that is to have your brand firmly ensconced in China, like Nike or Adidas, Miller explained. Less popular brands such as Sweden's H&M - which recently found itself in Beijing's crosshairs - may find themselves on the brink of extinction.

Miller said Beijing still has use for Tesla, but what it's experiencing now is a "preview of what Elon will eventually see." Tesla, he said, will continue to have the favor of the Chinese government "until it's no longer pragmatic, and then China will crush them."

In this sense, Tesla and Beijing are at odds. It is in the company's best interest to take as much market share as it possibly can while it can. But it is in the government's interest to temper Tesla's growth and eventually rein it in. When that could happen is hard to know. But what's clear is that Beijing holds the power to decide when that is - not Tesla.