By Peter S. Kim
It has been a horrific start to the year for the founder of Tesla, Elon Musk, who not only lost his status as the world's richest person this year but also lost a case in which a judge ruled against his stratospheric CEO compensation package of $56 billion for the year 2018. While it is hard for anyone to feel sorry for Mr. Musk, there is even more bad news ahead for the flamboyant CEO. Last month, Tesla's fourth-quarter earnings announcement showed both disappointing results for sales growth and net profits. Further, the 2024 outlook was the uncharacteristically somber one from Tesla. The news is of special interest to Koreans, as Tesla is arguably the most revered stock among retail investors here. Unfortunately, Korea's love affair could be coming to a dramatic end during the Year of the Dragon. One key reason for the gloomy outlook is a syndrome familiar to Korean companies: Chinese competition.
Over the past few months, media attention has focused on China's big global push for electric vehicles (EVs). China's BYD sold more than Tesla globally during last year's fourth quarter for the first time, with 536,000 units versus Tesla's 485,000 units. For the full year, Tesla is still the biggest seller of EVs with 38 percent year-on-year growth, but with BYD's 70 percent year-on-year growth, it is likely to be the last year that Tesla is crowned as the biggest seller of EVs. It is not just the sales growth that Tesla has to worry about, given that it is fighting profit margin pressure from intensifying price competition not just from Chinese OEMs but the rest of the competition, led by Hyundai and Kia Motor. We have seen this movie before, where China attacks existing industries with fierce price competition backed by government support while relentlessly improving its quality. If the EV industry joins other sectors China has overwhelmed, like LCD screens, shipbuilding, chemicals and steel, Tesla's place as one of the legendary members of the "Magnificent Seven" stocks will come under threat.
Since entering the World Trade Organization in 2003, China has aggressively embraced the classic emerging economy export strategy of using government support and cheap labor to move up the value chain from the low end of the product curve. South Korean companies also began with a similar approach, usually against their Japanese counterparts, with typically a 20 to 30 percent discount to the market leader. They then narrowed the quality gap while maintaining the price to gain market share. For China, its strategy was executed at an unprecedented pace and scale, thus causing the eventual backlash from the U.S.-led global community. While South Korea and Japan adopted a similar approach, China's relentless ramping up in every manufacturing segment has been the leading cause of anti-China sentiment spreading today.
However, the trade tensions are unlikely to slow China's export push on EVs as many countries prioritize appeasing price-conscious consumers over nationalistic sentiment against Chinese products. In particular, with economies slowing and consumers seeking cheaper alternatives, BYD and other Chinese producers could see an environment ideally suited to expanding their market share overseas.
Back in the 2009 subprime mortgage crisis, Hyundai and Kia Motor experienced a similar situation where they almost doubled their U.S. market share within a few years. Faced with a seemingly long and painful recession, U.S. consumers tightened their belts and looked for value, which led them to Hyundai cars, whose improving quality had been underappreciated until then. Lured by Hyundai's aggressive discounts, promotions and free options, U.S. drivers discovered surprising quality and value from Hyundai cars and finally helped it establish a U.S. footprint. Similarly, Chinese EV companies are poised to target developed market consumers over the next few years, preying on consumers looking for the right balance between value and quality. It will be interesting to see how individual countries will react to the Chinese EV imports, but for those countries without competing auto brands, it is likely to be welcomed rather than resisted.
Tesla's product strategy playbook could get help from Apple's long-running battle with Samsung's handsets. In 2013, Samsung emerged as the world's largest seller of smartphones after knocking Nokia off the top spot. Understandably, Apple showed concern about Samsung's challenge despite having a solid market share within the premium segment. To penetrate the voluminous cheaper-end segment, Apple introduced the iPhone 5c model to compete with the aggressively priced models from Samsung. However, Apple eventually retreated on its volume strategy and has reverted to focusing on solidifying its position at the premium end, leaving others to fight for the low-margin part of the market. This year, Apple is not only one of the most profitable companies in the world, but its smartphone market share is even above Samsung's market share with 21.1 percent versus Samsung's 19.4 percent.
Similarly, Tesla's response to China Inc.'s onslaught will be critical to its strategic positioning as the premium player within the EV space. Apple's ability to create an ecosystem around its iPhones with accessories, Apple Music, its App Store and collaboration with outside app designers has been critical to its growth beyond handsets. Tesla has yet to show it has an expansive ecosystem beyond its automobiles, while its lead with its product differentiation against rising competition is narrowing quickly.
Accordingly, Tesla's dizzying stock valuation will come under intense scrutiny from investors with the slowing economy and declining government support for ESG-related subsidies. Thus far, Tesla has successfully branded itself as a technology-driven platform company, as evidenced by its stock valuation exceeding that of other internet companies like Google and Amazon. However, Elon Musk and Tesla are facing their greatest challenge yet, and its future may be starkly different from what we saw from Apple.
Peter S. Kim is director at the KB Financial Group.
China is coming for Tesla
24
0
08.02.2024
By Peter S. Kim It has been a horrific start to the year for the founder of Tesla, Elon Musk, who not only lost his status as the world's richest person this year but also lost a case in which a judge ruled against his stratospheric CEO compensation package of $56 billion for the year 2018. While it is hard for anyone to feel sorry for Mr. Musk, there is even more bad news ahead for the flamboyant CEO. Last month, Tesla's fourth-quarter earnings announcement showed both disappointing results for sales growth and net profits. Further, the 2024 outlook was the uncharacteristically somber one from Tesla. The news is of special interest to Koreans, as Tesla is arguably the most revered stock among retail investors here. Unfortunately, Korea's love affair could be coming to a dramatic end during the Year of the Dragon. One key reason for the gloomy outlook is a syndrome familiar to Korean companies: Chinese competition.
Over the past few months, media attention has focused on China's big global push for electric vehicles (EVs). China's BYD sold more than Tesla globally during last year's fourth quarter for the first time, with 536,000 units versus Tesla's 485,000 units. For the full year, Tesla is still the biggest seller of EVs with 38 percent year-on-year growth, but with BYD's 70 percent year-on-year growth, it is likely to be the last year that Tesla is crowned as the biggest seller of EVs. It is not just the sales growth that Tesla has to worry about, given that it is fighting profit margin pressure from........
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