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In a competition for emerging markets, Tesla chose to retreat.

A few days ago, according to news from Thailand, Tesla has canceled its plan to build an electric car factory in Southeast Asia. The original factory construction execution team sent to Thailand has withdrawn, and is currently only considering building local infrastructure such as charging piles. Except for China, the United States and Germany, Tesla will not build a new super factory in Thailand, Malaysia, Indonesia or anywhere else.

Soon, this information was confirmed by senior Malaysian officials. Malaysian Prime Minister Anwar responded that Tesla's decision to postpone its expansion plan in Malaysia was not because Malaysia was not doing well, but because of the fierce competition between Tesla and Chinese automakers. Malaysian Minister of Investment, Trade and Industry Zafrul also said that Tesla stopped its factory plan because they lost market orders and found it difficult to compete with Chinese automakers, but Tesla's withdrawal would not have a substantial impact on Malaysia.

In the eyes of many car companies, Southeast Asia is a promising place with broad growth potential, and it can also be used as a "transit" to enter the European and American markets. But in this crucial battle to expand into Southeast Asia, where did Tesla lose? How can Chinese car companies go to Southeast Asia to shake the inherent pattern of the Japanese car industry dominating the market?

Unfinished Southeast Asia Blueprint

In March this year, Tesla's Model Y was delivered to Malaysia for the first time, and the owner who received the country's first new car posted a message on the social platform to commemorate it. A few hours later, Rohan Patel, senior director of public policy and business development at Tesla, retweeted the tweet and wrote that Southeast Asia will undoubtedly become a major growth area for battery storage and electric vehicles in the next few years.

At that time, Musk was also showing his optimism about Southeast Asia with his actions. In July last year, Musk and Malaysian Prime Minister Anwar had a video call to discuss potential investment. In September last year, Musk met with then-Thai Prime Minister Setiawan, who revealed that Tesla and other American companies would invest at least $5 billion in Thailand. At the end of November last year, Tesla executives visited Thailand. In May this year, Musk met with Indonesian President Joko Widodo, and after Indonesia launched Starlink, there were rumors that he would give Tesla's battery factory a "gift package."

On the one hand, the growth of new energy vehicles in Southeast Asia is remarkable. According to data from market research firm Counterpoint Research, in the second quarter of 2023, the total sales of electric vehicles in the Southeast Asian market surged 894% year-on-year, the highest in the world. In the first quarter of this year, the sales of fuel vehicles in Southeast Asia fell by 7%, but the sales of electric vehicles doubled compared with the same period last year. With the dazzling growth rate, Tesla naturally covets the cake of the emerging market in Southeast Asia.

On the other hand, in order to attract Tesla to set up a factory and drive the transformation of the domestic automobile industry, several Southeast Asian countries have offered strong policy incentives. Indonesia has rich battery resources such as nickel, manganese and cobalt, and has offered Tesla nickel mining concessions, tax exemptions, electric vehicle subsidies and other policy incentives. Malaysia has always adhered to the equal rights law, and foreign investment must be made by local indigenous people. However, it has made an exception for Tesla, allowing it to enter Malaysia as a wholly foreign-owned enterprise. Thailand said it can provide 100% green energy to the Tesla factory.

But when the outside world thought that Tesla and Southeast Asia were about to go in both directions, why did Musk finally slam on the brakes and stop the factory construction project?

Sales volume falling short of expectations may be the main reason. Chen Weiwei, a market analyst at Gasgoo Automotive Research Institute, told the 21st Century Business Herald reporter that the size of the local pure electric market in Southeast Asia is still not enough to support Tesla's enthusiasm for building a factory there, and the current production capacity of the Shanghai factory is still sufficient to cover the needs of the Southeast Asian and Asia-Pacific markets. So from an economic perspective, Tesla would rather bear the tariff costs and sell cars to Southeast Asia through imports rather than setting up factories there. Also, because Tesla is positioned in the mid-to-high-end market and has a greater profit elasticity, the tariff costs are still within an acceptable range.

In 2022, Tesla and BYD had roughly the same market share in Southeast Asia, both around 6%, and neither of them made it into the top five electric vehicle brands in Southeast Asia. But in 2023, Tesla was overtaken by BYD, and the gap between the two is getting bigger and bigger. According to Counterpoint data, BYD's share of the Southeast Asian electric vehicle market exceeded 26% in the second quarter of 2023, while Tesla's market share was about 8%. In the first quarter of this year, Tesla's market share shrank to 4%, and BYD has won 47% of electric vehicle orders in Southeast Asia.

In addition to losing market share, Tesla also has to consider the difficulty of setting up factories in Southeast Asia. Lin Shi, secretary general of the China-Europe Association for Intelligent Connected Vehicles, told the 21st Century Business Herald reporter that Tesla's super factory in Shanghai can take advantage of local advantages such as complete industrial supporting facilities and sufficient talent reserves; however, the electric vehicle industry chain in Southeast Asia is weak, workshop workers are inefficient, there is a shortage of engineering talents, and there are many loopholes in local laws and regulations and business environment, all of which are disadvantages that easily discourage companies from setting up factories.

In the race to change lanes, Japanese cars are losing ground

For a long time, Japanese cars have made the Southeast Asian market their own "backyard" by virtue of their early overseas expansion and strong localization. In 2023, Japanese cars sold 1.93 million units in five Southeast Asian countries, namely Thailand, the Philippines, Singapore, Malaysia and Indonesia, accounting for 68.9% of the market share. Around 2016, when the influence was at its peak, the share of Japanese cars exceeded 80%.

Therefore, whether it is Korean cars, German cars, Chinese car companies, or Tesla, the global electric car leader, if they want to enter the Southeast Asian market, the first thing they need to face is the competition from Japanese cars.

"Japanese cars have been exported since the 1960s and 1970s, and the entire dealer system has been established very well, with extensive distribution channels in Southeast Asia." Chen Weiwei introduced that after Japanese cars occupied the market through a powerful distribution network, the number of gasoline cars in Southeast Asia is large, so dealers can also obtain stable profit income through after-sales maintenance.

However, the dominant position of Japanese cars is being shaken.

Indonesia has the largest automobile market in Southeast Asia. In 2023, the three major Japanese brands Toyota, Daihatsu and Honda took 66% of the market share in Indonesia. From January to July this year, the market share of the three major automakers fell to 63%. The contraction of Japanese cars in Thailand is more obvious. In 2022, Japanese car brands accounted for 86% of new car sales in Thailand. Last year, this figure dropped to 75%. At the same time, BYD, Great Wall and SAIC's presence in the local market continued to increase.

Honda Motor announced in July that it would merge its two production bases in Thailand into one by 2025. Suzuki Motor also said in June that it would stop producing cars in Thailand due to declining sales.

The slow transition to electrification is considered the main reason why Japanese cars have lost their growth momentum. At the end of last year, Thailand's then Prime Minister Setia Saifuddin said that Japanese manufacturers have lagged behind and if Japanese automakers do not speed up the transition to electrification, they will fall behind in the industry. Sanshiro Fukao, a senior researcher at Itochu Research Institute, admitted that Thailand has become an export base for neighboring countries, and if Japanese automakers do not take measures, their leading position in Southeast Asia may be changed.

In the race to replace new energy vehicles, Chinese automakers have secured a leading position in Southeast Asia. According to a report by Counterpoint Research, in the first quarter of this year, Chinese brands represented by BYD accounted for more than 70% of electric vehicle sales in Southeast Asia.

In addition to the cost-effective positioning of Chinese brand cars, which helps them to penetrate the vast mid- and low-end markets in Southeast Asia, Chen Weiwei also added that various car companies are also working hard on marketing. For example, when Japanese cars are still using the 4S store model, Chinese car companies are copying domestic practices and moving car showrooms to supermarkets, and selling cars offers various benefits such as charging stations, points, and license plates.

At the same time, the overseas model of car companies has been iterating. Chen Weiwei said that before, China mainly entered the Southeast Asian market through the export of complete vehicles, but it was subject to many restrictions, such as high tariffs, quota restrictions, and pricing cannot be too low to allow local Southeast Asian car brands to have low-price advantages. In recent years, car companies have begun to change their strategies. Chery, GAC, Great Wall and other car companies in Malaysia, Indonesia, and Vietnam will find local assembly partners to complete local production in the form of CKD (complete knock-down) or SKD (semi-knock-down). Thailand has a more mature automobile industry base and the largest electric car market in Southeast Asia, so BYD, Great Wall and other car companies have also begun to build full-process vehicle manufacturing plants in Thailand in recent years. In addition to meeting the local market, they use Thailand as a base to export complete vehicles to Southeast Asian countries, Australia, New Zealand and other surrounding areas. Since Thailand has signed FTA agreements with many countries, it can enjoy zero or low tariffs.

Potential headwinds

Since the beginning of this year, the United States and the European Union have successively set up high tariff barriers on Chinese cars, and emerging markets have become an important support for domestic car exports. According to data from the General Administration of Customs of China, from January to May this year, China's car exports to ASEAN increased by about 10%, of which exports to Vietnam increased by 22%, to Malaysia by 11%, and to Indonesia and Thailand also exceeded the same period last year.

Although Southeast Asia generally welcomes Chinese automakers to set up factories there to drive the growth of the auto industry and the transition to new energy, the road to going overseas will inevitably encounter headwinds from local protectionism.

Chen Weiwei said that among the major automobile producing countries in Southeast Asia, such as Thailand, Indonesia and Malaysia, only Malaysia has two relatively strong local automobile brands, Proton and Peugeot. Therefore, when facing external automobile companies, Malaysia's local protectionism tendency is more obvious. They hope that Chinese automobile companies will not only invest and build factories locally, but also provide corresponding technology output.

Chen Weiwei gave an example, saying that more than a decade ago, when a certain independent car company first entered the Malaysian market, it found a local partner to build a KD factory. However, the Malaysian government at that time believed that the car company did not provide any technical output, so it took restrictive measures against it, requiring that only about 40% of the cars produced locally could be sold in Malaysia, and the remaining 60% must be exported abroad. Later, the car company's sales in Malaysia suffered a big blow. After Geely acquired 49.9% of Proton's shares, it transferred the patent rights of its models to Proton for the other party to produce under its own brand. This model was welcomed by Malaysia.

In the process of going overseas, in addition to being prone to hitting the steel plate of protectionism, copying domestic models may sometimes also encounter setbacks.

In early July, the Thai Consumer Protection Association said it had received complaints from consumers that BYD dealer Leifu had slashed the price of its cars, causing dissatisfaction among some car owners. Customers who had already placed orders were caught off guard by repeated discounts and large cashbacks on the same model. Currently, the Thai Prime Minister's Office has instructed the country's consumer protection agency to launch an investigation.

Lin Shi also pointed out that crazy price wars will not only squeeze profit margins to the extreme and affect the survival and development of enterprises, but also affect the brand image of enterprises, making them easily regarded as low-end brands by overseas consumers and gradually losing their favorability.

At the same time, Lin Shi reminded that in order to attract car companies to build factories, many Southeast Asian countries often offer extremely attractive preferential policies for investment promotion, but there are also considerable variables as to whether the promises can be fulfilled after the project is implemented.

"Chinese automakers have now captured the vast majority of the new energy vehicle market in Southeast Asia, but whether they can gain a foothold locally depends on whether they can capture the fuel vehicle market, because the proportion of new energy in the automobile market is not high and fuel vehicles still dominate." Chen Weiwei admitted that in order to truly reverse the deep-rooted position of Japanese cars in Southeast Asia, Chinese automakers still have to gradually build a complete system from parts support, vehicle production capacity, distribution system, financial services to the after-sales market, and this will take time, step by step.