Tesla CFO Zachary Kirkhorn said that the cost of vehicles produced at its Shanghai factory in Q1 is already lower than the cost to produce the Model 3 in the US. Credit: Tesla.

In a clever move by CEO Elon Musk, automaker Tesla Inc. said it has cut the starting price for China-made Model 3 sedans by 10% to qualify for subsidies in the lucrative Chinese market, CGTN.com reported.

Tesla, which started delivering cars from its $US2 billion Shanghai car plant in December, said in a statement it cut the starting price for its Standard Range Plus Model 3 sedans to 271,550 yuan (US$38,463.17), after receiving 20,250 yuan per car as EV subsidies.

China had announced plans in 2015 to end subsidies for electric vehicles this year, but said in March it would extend them. However, it said the subsidies will apply only to passenger cars costing less than 300,000 yuan, CGTN.com reported.

China has set a target for NEVs, which also include plug-in hybrids and hydrogen fuel cell vehicles, to account for a fifth of auto sales by 2025, compared with the current 5%, as it seeks to cut pollution and cultivate home-grown auto sector champions.

Under the new plan, China will extend subsidies for buying NEVs to 2022, and tax exemptions on purchases for two years, CGTN.com reported.

The move of extending the subsidies brings new energy vehicles (NEV) a cost-price advantage of more than 20% over traditional fuel vehicles, a huge favorable policy worth tens of billions in yuan. 

China is the world’s biggest car market, where more than 25 million vehicles, including 1.2 million NEVs, were sold last year.

Meanwhile, while consumer confidence may take time to recover, government and commercial purchases are expected to drive the electric vehicle market in China this year as well, CNBC reported.

“We believe the demand from the institutional buyers will be strong,” said Jing Yang, director for corporate research at Fitch Ratings in Shanghai, pointing to data for 2019 that showed the share of individual purchases fell to 46% from 58.9% a year prior.

Tesla CFO Zachary Kirkhorn added that the cost of vehicles produced at its Shanghai factory in the first quarter is already lower than the cost to produce the Model 3 in the US, Tech Crunch reported.

That margin should improve as the company improves its local supply chain in China. Tesla still ships some parts from the US to build cars at its Shanghai factory.

The price cut might have to wait until Tesla starts using CATL’s batteries in the made-in-China Model 3 vehicles, ElecTrek reported.

In November of last year, Tesla secured a battery cell supply deal with CATL for Model 3 vehicles built out of Gigafactory Shanghai.

Around the same time, there were reports that Tesla was looking into reducing the price of the made-in-China Model 3 by as much as 20% as they produce more parts locally.