Tesla : Summoned by Chinese Regulators on Quality Issues -- 3rd Update

By Trefor Moss and Yoko Kubota

SHANGHAI -- Tesla Inc. has been summoned by Chinese authorities citing consumer complaints about quality issues, a warning for the electric-vehicle maker in a country where it has enjoyed a welcome rarely seen for foreign companies.

The State Administration for Market Regulation, China's top market regulator, said Monday that it and four other regulators had instructed Tesla to abide by Chinese laws and regulations and strengthen internal management to ensure the quality and safety of its products.

It was a rare rebuke for Tesla, the first foreign auto maker to operate a wholly-owned plant in China.

In a statement late Monday in China, Tesla Shanghai said it "sincerely accepted the guidance of government departments." It said it had "deeply reflected on shortcomings" and was working on strengthening its operations. It also said it would investigate Chinese consumers' complaints and abide by Chinese laws and regulations.

The tone the car maker struck in its response to Chinese regulators differed sharply from the stance Chief Executive Elon Musk has taken in the U.S. when he has come in for government scrutiny. In 2018, he sparred with the Securities and Exchange Commission, which investigated his tweets about taking Tesla private, a move that didn't happen. Last year, he battled with local authorities in California that temporarily ordered his lone U.S. car plant closed to slow the spread of the coronavirus.

When a U.S. car regulator this year requested the recall of some Model S and Model X vehicles, Tesla agreed to fix affected models, but said it disagreed that touch-screen failures constituted a defect and called the agency's rules "anachronistic."

China's highly public message of dissatisfaction with Tesla's quality issues comes as the Palo Alto, Calif., electric-car maker ramps up production of the Model Y compact crossover vehicle at its plant in Shanghai. It also follows recent global recalls of the U.S.-made Model X sport-utility vehicle and Model S sedan, which affected imported models in China.

The China market, where Mr. Musk has been widely feted, has become increasingly important for Tesla. Deliveries in the country last year helped the company achieve roughly 500,000 vehicle deliveries globally, a record. And Tesla said the increase in Model Y production in China would help offset lower volume of Model S and Model X vehicles in the U.S. as the company transitions to introducing updated versions of those models.

Public scrutiny of Western companies that cater to Chinese consumers isn't unusual and is often fueled by state media. Chinese broadcasters have put the spotlight on Apple Inc. and Tesla rival Volkswagen AG over some of their business practices in the country. Starbucks Corp. has come in for criticism related to pricing. All three companies responded with conciliatory statements.

The scrutiny for Tesla comes at the same time it faces growing competition in the booming Chinese electric-vehicle market from domestic rivals. Chinese electric-vehicle startup NIO Inc. unveiled a fourth production model last month. Two rival Chinese electric-vehicle startups that listed in the U.S. last year are also building momentum. Li Auto Inc. has one model on sale and has said a second will become available next year. XPeng Inc. has two models in production, and has announced plans for a new sedan.

Vehicle recalls are common in the auto industry. However, Tesla has often performed poorly in quality surveys conducted by market-research company JD Power. In one such survey last year, it came last out of 32 vehicle brands in terms of quality.

While vehicles built in Shanghai weren't affected by the latest recalls, the summons by regulators was seen as a warning to Tesla to get its act together as it expands local output, said Tu Le, managing director of Sino Auto Insights.

"It seems that the ministries are trying to get out in front of potential failures as Tesla ramps up Model Y production," he said.

For Tesla, the regulatory summons marks a change in tone from its Chinese hosts.

Tesla won approval for its Shanghai factory in 2018 despite the deterioration of U.S.-China trade relations under former President Donald Trump. In doing so, Tesla became the first foreign auto maker to operate a wholly-owned plant in China, taking advantage of a recent rule change allowing foreign EV makers to manufacture without a local partner from 2018 onward.

That success has made Tesla the envy of the auto industry in China, where other global auto makers must devote significant energy to managing the relationship with their local joint-venture partners. It also signaled that even in the heat of the U.S.-China trade war, U.S. companies could flourish in China by making long-term commitments to the country.

Some of China's biggest state-owned banks were instrumental in funding Tesla's operations in the country, while local authorities issued permits with unusual speed, allowing Tesla to start making the Model 3 sedan at its Shanghai plant only a year after the January 2019 groundbreaking. It recently started assembling the Model Y there, too.

As Tesla's production in China expanded, technical and quality issues around its cars started to come under the spotlight.

Last month, the state-run Economic Information Daily reported on accidents of locally produced Model 3s, as well as of the imported Model S, saying they were caused by a malfunction in Tesla's autopilot system.

Tesla also suffered a recent run-in with Chinese utility State Grid Corp. after a Tesla employee appeared to suggest to a customer in a recording that the state-run company was to blame for battery issues in a Model 3 vehicle.

Coming on the heels of broad regulatory action against a number of private-sector companies in China, the public announcement that Tesla had been called in to regulators showed Beijing's concern with the company's operations in China and the urgency in addressing the issues.

"This is a warning to Tesla but can also be read as a warning to all the EV companies," said Mr. Le of Sino Auto Insights. He pointed to various car makers who have rushed to build and sell more electric cars -- packed with batteries and software -- in the world's biggest EV market.

Tesla's recall announcement last week affecting the Model S and Model X followed the recall of 48,442 imported Model S and X cars in China in October over concerns about faulty suspension systems.

The Global Times, a state-owned Chinese tabloid, criticized Tesla this weekend after the latest recall announcement, saying the car maker "is far from understanding Chinese consumers."

Quality issues don't appear to have slowed Tesla's sales momentum in China, however. The company sold 15,484 locally built Model 3 sedans and Model Y compact crossover vehicles in January, according to the China Passenger Car Association.

That followed China sales of 135,400 vehicles last year, according to the association, a performance that helped the company post its first yearly profit of $721 million in 2020.

Rebecca Elliott and Raffaele Huang contributed to this article.

Write to Trefor Moss at [e-mail] and Yoko Kubota at [e-mail]

(END) Dow Jones Newswires

02-08-21 1409ET