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Carmaker Tesla wins China fans with ‘fair’ price strategy

In China, where higher prices mean prestige, luxury U.S. electric carmaker Tesla is taking a bold step to win over clients and cachet by curbing the markup to just half of what some of its rivals can command.

Though it risks relegating its brand to a lower tier, Tesla's marketing strategy could prove a model for other imported brands, which have come under fire from China state media and regulators for allegedly ripping off shoppers with inflated prices.

(Read more: Tesla unveils price of Model S in China)

In an unusual blog post last month, the firm detailed the lower-than-expected 734,000 yuan ($121,400) China price tag for its high-end Model S electric car. The price, still 50 percent higher than in the United States, includes only "unavoidable" taxes and transport costs, it said.

"If we were to follow standard industry practice, we could get away with charging twice as much for the Model S in China as we do in the United States. But we're doing things differently," Tesla said in the blog on January 22, posted to consumers through popular Chinese social media channels.

A Model S sedan is displayed in the Tesla showroom at Parkview Green Shopping Mall Beijing, China.
ChinaFotoPress | Getty Images
A Model S sedan is displayed in the Tesla showroom at Parkview Green Shopping Mall Beijing, China.

The blog, titled "A Fair Price", drew overwhelming support from China's active netizens. One reader survey on popular site QQ.com, which received over 80,000 votes, showed that 90 percent of consumers supported the U.S. carmaker's move.

Analysts said the lower price strategy could deter premium segment buyers, who are usually willing to spend extra to guarantee quality and cachet.

"Price transparency helps because people see that as different, but the lower price itself, I don't see a big impact from that," said Andreas Graef, Shanghai-based principal focused on automotive at consultancy A.T. Kearney.

(Read more: Will Tesla's Model S succeed in China?)

Car makers often charge steep mark-ups in China. Daimler high-end Mercedes-Benz SLS AMG model costs 3.1 million yuan ($509,000) in China, according to its local website, 150 percent above its starting price in the United States. Volkswagen's Audi TT Coupe costs 519,000 yuan ($85,800) in China, over twice the U.S. starting price.

While other auto firms already offer price rebates to lure China buyers, Tesla is the first to make a clear statement about charging Chinese shoppers the same as in overseas markets, turning transparency into a neat marketing ploy.

"It's not just about the pricing strategy, but more to show how to communicate with Chinese consumers in the context of a more transparent pricing world," said Shawn Wu, Shanghai-based project manager at consultancy SmithStreetSolutions.

Last year, Tesla's total car sales were around 22,500, mostly in the United States. The California-based company, which plans to open stores in 10 to 12 Chinese cities by the end of 2014, says it expects China to contribute to one-third of its sales growth this year.

Risky gamble

Foreign makers of products ranging from milk powder to handbags have traditionally been able to charge steep premiums for high-end products in China, where the price is often closely associated with quality and prestige.

But, with closer attention from state media and increasingly aware shoppers, consumers have grown dissatisfied with artificially high prices, said Oceanne Zhang, leader of market insights for consultants Kantar Retail in Shanghai.

"They can just check overseas prices or travel abroad and they realize what they are paying extra for is not a premium in other markets. It's only a premium in China," she said.

(Read more: Tesla's CEO: Call it a remedy, not a recall)

Firms including U.S. retailer Wal-Mart Stores and coffee house Starbucks have attracted the attention of China's state television and regulators due to their high prices.

China Central Television (CCTV) has targeted international carmakers for high prices before. A report in December singled out firms including Audi and Jaguar Land Rover, owned by India's Tata Motors.

Imported milk powder firms have also come under the spotlight over their high prices, with Mead Johnson Nutrition, Danone and New Zealand dairy Fonterra Co-operative Group all scrutinized last year.

Tesla's strategy, it hopes, will break the mould of high price setting of imported products, said Veronica Wu, Tesla's new chief of China operations who joined the California-based carmaker in December from tech giant Apple.

"I hope it will. I think it is the right thing," Wu said inside Tesla's flagship store in Beijing, its first in China, which opened for business late last year. High prices prompted CCTV to say the market had become a "treasure bowl" for global carmakers last year.

The risk is that by lowering prices, Tesla could sacrifice its premium edge as well as reduce its margins in China, though analysts said the focus on transparency could help the U.S. firm differentiate from rivals.

(Read more: Tesla gains on strong sales; government issues 'recall')

The real benefit for Tesla's "fair price" model will be if it can win over shoppers, skeptical of being conned by high prices of rivals. And going by online chatter, the signs look good.

Social media posts mentioning the Chinese name for "Tesla" jumped over seven-fold overnight to 3,502 on January 23, the day after the blog post, with the vast majority in support of the carmaker's pricing strategy.

"At last, a business with conscience," said one user on China's Twitter-like Weibo. "It's good to see something else other than monopolies and pricing cartels in China."

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