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Tesla's plan for China is set to take off

Monday, 16 Dec 2013 | 6:19 PM ET
A couple view a Tesla Model S sedan displayed in a Beijing showroom.
ChinaFotoPress | Getty Images
A couple view a Tesla Model S sedan displayed in a Beijing showroom.

On the Chinese calendar, 2014 is the year of the horse. On the roads of China, it could be the year of the Model S.

After a slow start in the country, Tesla is taking orders in the world's largest car market and hoping to cash in on two trends that favor the automaker:

  • The Chinese have a voracious appetite for luxury cars.
  • High air pollution levels mean the government has a major incentive to push clean-running electric cars.

"I think the China story is a huge one," said Matthew Argersinger, senior analyst at The Motley Fool. Tesla is "going to sell 10,000 to 20,000 beginning in a couple years, and that's a huge incremental increase in production."

The automaker is now taking preorders on its Chinese website, Tousule.cn, for the Model S—which costs $41,000 to reserve—and the Model X. The site's launch comes just a month after Tesla opened its first location in China.

(Read more: Drivers' need for speed is hard to break)

Between that showroom in Beijing and the dedicated website, the automaker has laid the groundwork for deliveries of the Model S in China early next year.

The question now is how many cars will Tesla sell there.

A convergence of factors

Earlier this year, when CEO Elon Musk was asked about international demand for the Model S, he admitted he wasn't quite sure what to expect.

"I think we could eventually sell 10,000 a year in Europe and 5,000 in Asia," he said.

Tesla is expected to perform well in China because it has a number of the ingredients needed to create a surge in sales.

(Read more: In the midst of investigation, Model S tops survey)

One is its position as a luxury brand, and China will soon be the world's largest market for luxury autos. The Chinese have an intense appetite for high-end cars and SUVs, which is why BMW, Mercedes-Benz, Cadillac and Audi are rapidly expanding their showrooms in the country.

Tesla is an ecosystem: Analyst
Louis Basenese, chief investment strategist at the Wall Street Daily, calls Tesla's valuation is irrational, while Matthew Argersinger, senior analyst at The Motley Fool, says Tesla will attract new demand.

Steep taxes could push the price of the Model S to at least $145,000 there, but that won't slow down demand among wealthy Chinese.

Although electric car demand in China has been lackluster (and that's being kind), another factor helping Tesla is the smog and pollution that choke Beijing and Shanghai. They signal that China will not wait much longer to push electric cars in a big way. The Chinese would prefer to see locally built e-vehicles, but—make no mistake—Tesla will benefit.

(Watch: Tesla's Musk speaks out on battery production)

What's more, much as Americans love big SUVs and crossovers, the desire is just as great in China. SUV sales are booming there. The Model X is unlikely to arrive until early 2015, but when it shows up, it will have the potential to connect with buyers who want a big SUV or crossover.

Waiting for Model S investigation to wrap up

As Tesla ramps up sales in China, the question in the U.S. is what will come out of the government probe into the safety of Model S battery systems. The National Highway Traffic Safety Administration has been looking into fire in two Model S sedans as they drove over metal objects in two separate incidents.

Neither NHTSA nor Tesla is commenting on the inquiry. If it ends with Tesla issuing a recall, that could put a damper on sales and demand. On the other hand, it could wrap up with no action required at all.

—By CNBC's Phil LeBeau. Follow him on Twitter @LeBeauCarNews.

Questions? Comments? BehindTheWheel@cnbc.com.

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  • Phil LeBeau is a CNBC auto and airline industry reporter based in the Chicago bureau and editor of the Behind the Wheel section on CNBC.com.

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