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Why Tesla will win in China

Tesla's new initiative to sell to China will likely yield huge results, particularly given the thirst for American products by the Chinese affluent and the focus on moving toward better environmental standards.

What most investors do not recognize is that China is moving quickly from an export economy to internal consumption. One only needs to spend time in Shanghai, Tianjin, Beijing or Macau to recognize that Chinese affluent product consumption is skyrocketing. Las Vegas Sands, which operates casinos in China, recently released results that showed that the revenue from China eclipsed that of Las Vegas. Apple's earnings recently showed that sales are strongly increasing in China. The same demand will occur with Tesla.


Tesla Model S
Allen Wastler | CNBC
Tesla Model S

According to public records, approximately 14,000 electric vehicles were purchased by motorists in China; this reflects a 30-percent gain from the previous year. Like most countries, China has ambitious goals to populate its highways with alternative energy vehicles and hopes to have 5 million environmentally friendly vehicles on the road in the next six years. Tesla is seeking to be a part of this growth curve.

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Tesla is not an inexpensive car to be sure. The company is charging over US $120,000 for its model S vehicle, which reflects the cost of the car as well as shipping costs and import taxes. The affluent in China who are early adopters are the target market for Tesla's new initiative and Elon Musk believes that the country could very well become the largest purchaser of their products within the next several years. Still, he is quoted as saying that he does not want to be overly enthusiastic until results start to come in. The company has a modest goal of selling 5,000 cars in China this year.

Helping Tesla greatly will be one important attribute: Tesla is an American brand and, in China, that matters. One only needs to see the massive Cadillac dealership in Shanghai to realize that there is a thirst for American luxury brands. And Tesla is considered by the Chinese to be a brand that rivals other automakers like BMW and Mercedes. While the affluent are more careful with how they spend money as the Chinese economy slows, there is still massive wealth ready to spend on luxury goods. Tesla fits that bill perfectly.

Interestingly, despite headlines around the smog in China's cities and polluted water supplies, China is a country that is focused on becoming a more green economy. In the city of Hangzhou, there are numerous green-energy-focused companies sprouting up in this business-development zone. Environmentally-sensitive businesses are becoming more important as the marketplace demands solutions to pollution issues.

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I moderated a number of panels around the world with government officials and industry leaders about the future business prospects in Chinese business-development zones. A common theme was the focus on green initiatives and China's desire to turn the corner on its checkered environmental record. According to one government official, "This decision is not only environmental, but also business-related. Green technologies are going to be a huge market and China wants to lead in these efforts." (Chinese officials are generally hesitant to have their name made public when making policy observations.)

There's a reason why Elon Musk personally delivered the first Tesla to China. He knows better than anyone that selling to a huge affluent market pivoting towards more environmentally sensitive products makes good business sense.

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Tesla no doubt is a work in progress. The company is priced for spectacular future growth, though infrastructure concerns in terms of charging capabilities cannot be dismissed (particularly in emerging markets). But despite these challenges, the company is well-positioned to capture its share of consumption in China and you will see spectacular sales and huge waiting lists. Beware Mercedes and BMW — here comes Tesla.

Commentary by Michael A. Yoshikami, the CEO and founder of Destination Wealth Management in Walnut Creek, California. He is also a CNBC contributor.

Disclosure: Michael Yoshikami and Destination Wealth Management have no holding in Tesla.

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