Tesla Cuts the Price of its China-Made Model 3 by 10% Order to Qualify for China's Revised Subsidies for Electric Vehicles

author: Eric Walz   

Tesla's Gigafactory in Shanghai, China. (Photo: Qilai Shen/Bloomberg)

Last week, the Chinese government announced that it will extend subsidies for new energy vehicles (NEVs) through 2022 in its ongoing push to increase EV adoption in the country. Vehicles classified as NEVs include fully-electric, plug-in hybrid and fuel cell vehicles.

However, as part of the extension in subsidies, NEVs need to cost below RMB 300,000 (US$42,362) to qualify, which disqualifies the Tesla Model 3 which is now being built in China for the local market at Tesla's Shanghai gigafactory. So Tesla announced it is lowering the prices of the China-made Model 3 by 10% in order to qualify for the government subsidies, Reuters reports.

The subsidies were originally set to end at the end of the year.

In a statement, Tesla said it has cut the starting price for its Standard Range Plus Model 3 sedans to 271,550 yuan ($38,463.17), after receiving 20,250 yuan per car as EV subsidies. Before the price cut, the lowest priced China-made Model 3 was priced at RMB 303,550 (US$42,863).

The updated pricing is already reflected on Tesla's Chinese website.

China is the world's biggest auto market and an important market for Tesla to sustain its profitability. The California company also has a slight advantage over its rivals as the first foreign automaker to wholly own a factory in China, which allows its to build vehicles locally and avoid steep import tariffs. 

The first China-made Model 3 sedans were delivered to customers in early January from Tesla's newly constructed Shanghai gigafactory. Tesla also plans to build the new Model Y crossover in China.

Tesla employees celebrating the first Model 3s built at the company's Shanghai gigafactory.

China has set an aggressive target for new energy vehicles (NEVs) to be 20% of new car sales by 2025 as part of the government's plan to reduce air pollution in the world's biggest auto market. Currently, sales of NEVs account for 5% of all vehicles sold. Total vehicle sales in China, including gas-powered models, reached 25 million units in 2019.

However in 2015, China announced its plans to end subsidies for NEVs at the end of 2020, stating that automakers have become too reliant on them. The generous subsidies for the past several years have led to a new crop of electric vehicle startups to emerge in China crowding the market. 

Last year, there were over 450 NEV manufacturers registered in China. When China reduced the subsidies in 2019, the goal was to "to promote the survival of the fittest," according to Xinhua, China's official state news agency. Among the more prominent Chinese EV startups competing with Tesla are Byton, Xpeng Motors and NIO. 

In July, 2019 China's monthly NEV sales dropped for the first time in two years which led to the decision to extend NEV subsidies.

As part of the new plan, the Chinese government will reduce subsidies in 10% increments each year, beginning this year. In 2021, the subsidies will be cut by 20%, then by another 30% in 2022, according to the document jointly issued by the four Chinese Ministries.

The revised subsidy policy is in effect as of April 23, with a three-month grace period ending July 22. 

Even as the coronavirus pandemic impacted China's auto sales this year, Tesla delivered 10,160 vehicles in China during the month of March, its highest monthly total ever, according to the China Passenger Car Association.  Most of these vehicles were Model 3 sedans.

In December 2019, Tesla was granted an exemption from a 10% purchase tax for its China-built Model 3 sedans, which also helped to boost sales.

Eric Walz

Originally hailing from New Jersey, Eric is a automotive & technology reporter covering the high-tech industry here in Silicon Valley. He has over 15 years of automotive experience and a bachelors degree in computer science. These skills, combined with technical writing and news reporting, allows him to fully understand and identify new and innovative technologies in the auto industry and beyond. He has worked at Uber on self-driving cars and as a technical writer, helping people to understand and work with technology.