In early March, Tesla surprised everyone when it said it had just sold $1 billion worth of vehicles in China in 2016.
Until then, the narrative surrounding Tesla in China was that the company just didn’t get it. Because of high tariffs and taxes, Tesla’s Model S and Model X cost 50% more in the country than elsewhere, meaning Tesla would remain a bit player in the world’s largest market for cars. One analyst declared Elon Musk would reach Mars before cracking China.
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Tesla’s sales disclosure last year created a new narrative that Tesla might be on the path to turning China into a thriving market. And new first quarter data of Tesla’s China imports suggest that Tesla kept up its blazing growth.
Tesla imported 4,799 Model S and Model X SUVs into China in the first three months of this year, 350% more than the first quarter of 2016, according to data from JL Warren Capital, a New York-based researcher. If Tesla keeps up the pace throughout this year, the number of imports would nearly double its total last year. But since Tesla sales have increased towards the end of the calendar year in the country, JL Warren Capital’s data shows, Tesla is more likely to more than double last year’s sales.
China will likely become much more important to Tesla this year. Last year’s $1 billion in China sales composed about 15% of the company’s total; China revenue might reach $2 billion this year, if it doubles along with car sales, as Tesla’s total company revenue reaches $11.5 billion, analysts predict.
The latest first quarter data track imports, not end sales to buyers. But Tesla sells about as many cars as it imports in China. The California company keeps almost no inventory in the country. When Chinese buyers customize their car on Tesla’s website, choosing five, six or seven seats in the Model X SUV and whether to go for the big HEPA air filter, Tesla assembles the vehicle in the U.S. before shipping it over. Four months later, the Chinese buyer has her car.
The first quarter sales boomlet may lead Tesla investors to wonder what happens when Tesla builds cars in China under a joint venture with a local Chinese company and can avoid a 25% tariff and 17% value-added tax, while at the same time making its cars available for government subsidies, which today cut the buyer’s cost of some Chinese electric cars by 35%. Those central and local government subsidies are set to be phased out by 2020.
The timing of a joint venture is unknown and Tesla won’t comment. But as Fortune reported last week, Tesla is in the midst of meeting potential partners from different Chinese cities, according to a high-level official from China’s auto lobby. Back in 2014, CEO Elon Musk said the company would begin building cars locally in China around 2017 or 2018.
Without a joint venture, Tesla’s sales in China face a ceiling because of their higher costs. Not even the closest-watching analysts can predict what that number is.
But as Tesla’s fast growing first quarter sales attest, for now the company is far from reaching it.