Reuters reported on September 15 that Tesla is reevaluating the way it sells electric cars in the Chinese market, considering closing some showrooms in flashy malls in places such as Beijing. Tesla China responded to local media outlet Yicai that sales channels are still occurring at the normal rate of expansion within the country, and that the company wasn’t sure where the news came from.
According to Yicai, since September, Tesla has still opened experience centers in malls in Shanghai and Xi’an, Shanxi Province. Tesla now has 26 experiential stores in Shanghai, compared with 21 in the same period last year.
Tesla is the pioneer of the direct sales model of automobiles. Traditional automakers integrated showrooms, sales, delivery and after-sales services in 4S stores. Tesla chose to keep these functions separate in an effort to achieve greater user reach and scale in high traffic areas such as malls.
However, the disadvantage of the direct sales mode lies in their high operating cost. High rental costs in malls and labor costs have to be borne by the enterprise itself, and the initial terminal channel construction and expansion can create financial pressure.
In the first half of 2022, XPeng, Tesla’s rival in China, reported sales, general and administrative expenses of 3.306 billion yuan ($471 million), up 88.7% year on year. XPeng said the expansion of its sales network, associated personnel costs and increased franchise commissions were among the main reasons for the year-on-year increase in expenses. Sales, general and administrative expenses for Li Auto in the first half of the year reached 2.53 billion yuan, up 87.9% year on year. The increase in rental expenses due to the expansion of the sales network was also one of the main reasons for the increase in expenditure.
Although mall showrooms can bring in huge traffic numbers, they also require higher costs. Cui Dongshu, secretary general of the China Passenger Car Association (CPCA), said that the current new energy vehicle market in China is still in a period of rapid development. If market supply falls short of demand, the direct sales model can generate higher profits, but in an oversupplied market, that method may become a heavy burden.
Traditional auto companies such as Volkswagen, General Motors, GAC Aion and BYD are also accelerating the layout of showrooms in malls, but the cost of expanding these channels is mostly borne by dealers and investors. Volkswagen and General Motors adopt the direct selling model, where dealers only provide services to users. The showrooms of BYD and other auto companies is operated by dealers, which is no different from that of traditional 4S stores.
At the same time, with the increase of sales volume, vehicle companies focusing on showrooms in malls have begun to build more repair and delivery centers to better maintain the service system.
In the past two years, in addition to experience stores and experience centers focusing on display and sales, Tesla has begun to build centers in China to provide services such as consultation, test driving, maintenance and stamp spraying. The newly built outlets are still directly managed by Tesla. EV companies in China, including NIO and XPeng, are also expanding their service centers to integrate pre-sale and after-sales functions.