Tesla Revamps the Model 3, Staying Ahead of the Competition in the West but Fighting for Market Share in China

Tesla’s Project Highland, the long awaited Model 3 facelift, was unveiled in August. It comes with some exterior design changes to the front end, changing the look slightly and improving the aerodynamics, which Tesla claims will increase range by 5% to 8%. The updates are more extensive on the inside: rear seat passengers will now have their own 8-inch touchscreen, as with the Model S and Model X, which they can use to adjust the climate control or for entertainment. Also from the Model S and Model X comes the removal of indicator stalks: the indicators will now be controlled via buttons on the steering wheel and the touchscreen will be used to select gears. Along with this are myriad enhancements such as ventilated seats, an improved sound system, and better Bluetooth and Wi-Fi connectivity.

When the Model 3 was first launched in 2017, it had a massive impact on both Tesla and the automotive industry as a whole. Its base price of US$35,000, though it only materialized temporarily, was significantly cheaper than the Model S and X at US$70,000 and US$80,000, respectively, leading to over half a million pre-orders. The Model 3 started being truly mass produced in 2018; since then, the Model 3 and its derivative, the Model Y, have been responsible for all of Tesla’s sales growth. They have also contributed significantly to the overall growth of Electric Vehicle (EV) sales, particularly in the United States, where the Model 3 held two-thirds of the BEV market in 2018; even in 2022, the Model 3 and Y together had a 57% share of the American Battery Electric Vehicle (BEV) market.

When the Model 3 arrived, there was truly nothing like it. The affordable and highly desirable sedan opened up EVs to new customers, with more than 2 million units now sold worldwide. It is consistently the second best-selling EV in the United States and across Europe, behind only its sibling, the Model Y. The Model 3 set the standard for other Original Equipment Manufacturers (OEMs) to aim for, leading to a spate of “Tesla killers” from legacy OEMs and EV startups alike looking to replicate its success. In that case, why is Tesla still so far ahead of the competition?

Many of the Model 3 competitors have not yet had the chance to dethrone Tesla because they have taken too long to respond. All OEMs are, to some extent, copying Tesla, and the very nature of emulation is catching up from behind, which is difficult with the long development cycles of legacy OEMs. For example, Volkswagen (VW) expects deliveries of the ID.7 to start this quarter; it was first teased as the I.D. VIZZION 5 years ago (in 2018). Major OEMs, including BMW, Toyota, and Stellantis, still do not have any cars available built on dedicated EV platforms.

Tesla has a unique brand identity that separates it from legacy OEMs. It is electric-only and renowned for its work on electrification technology, attracting consumers who are interested in electric cars. Anyone buying a Tesla knows that they are getting a car from a company dedicated to EVs, unlike the offerings from other OEMs, which can often be reworks of existing Internal Combustion Engines (ICEs) or get lost in their ICE lineups. Though electrification is now in vogue, it was not too long ago that Fiat Chrysler’s Chief Executive Officer (CEO) was asking customers not to buy the FIAT 500e, a BEV model the company only sold due to legal requirements, taking a loss on every sale. OEMs arguing against the feasibility of mass electrification or pushing for delays in zero emissions targets do not inspire confidence in their EV products.

Tesla is also known for its minimalist tech-focused interiors that dispense of buttons and instrument panels, moving it all to a single large touchscreen. Aside from the aesthetic aspects, this saves cost and simplifies development by reducing parts count. By moving input and output to a screen, Tesla can easily change features and functionality through Over-the-Air (OTA) updates, a key principle of Software Defined Vehicles (SDVs). This has now been widely copied throughout the industry as OEMs make their own transitions toward greater software functionality, but many OEMs are now retreating from their attempts at making cabins free from physical buttons and switches. Drivers often find the lack of feedback and consistent control location difficult, unintuitive, or unsafe while driving. Tesla is not immune to this criticism either, but as a newcomer, it does not have to worry about retaining its customers in the same way that legacy OEMs do, and instead targets more tech-savvy consumers who are happy with or actively prefer its minimalist idiosyncrasies. This leaves legacy OEMs stuck with one foot in each camp, trying to imitate Tesla’s high-tech focus and build differentiation in software without losing their traditional customers who still want the reassuring click of a button.

Through a combination of a direct sales model, manufacturing innovation, and the benefits of starting from scratch in EVs, Tesla has lower production costs than its competitors. This means its EVs are more profitable for Tesla, but also cheaper than many others. The Tesla Model 3 often has both a lower cost and a greater range than alternative options, making it hard for other OEMs to compete.

Tesla completely dominates the North American EV market and is well ahead in Europe, but while it has been undoubtedly successful in China, it is more within the pack. This is because the nature of the Chinese market and the Chinese OEMs it competes with dampen its advantages.

The infamous “China speed” of development means that Chinese OEMs have been able to learn from and replicate Tesla’s innovations more quickly. VW is currently working to cut the time taken to develop a new car from 54 months to 36 months to close the gap with Chinese OEMs. At the extreme, FAW claims to be able to develop a new car in just 24 months. This speed can be seen with the imitators of the highly successful Wuling Hongguang Mini EV, announced in April 2020, with deliveries starting in July. By July 2021, Chery had unveiled the very similar looking QQ Ice Cream, followed in January 2022 by Dongfeng’s very similarly named FengGuang Mini EV. These have been followed by the BAW Yuanbao, Changan Lumin, and Geely Panda EV, among others. In just the 3 years since the Hongguang Mini EV launched and became one of the most popular EVs in the world, the Chinese automotive industry has responded with a host of alternatives.

Chinese EV startup XPENG looked to replicate Tesla’s success, earning itself a lawsuit for Intellectual Property (IP) theft in the process. Though it was founded in 2014, it was still going through Series A funding in 2016. By November 2018, it had begun mass production of its first car, the G3, and it has now progressed so far that VW has signed a deal to use its technology.

Along with XPENG, there are several other EV startups in China such as NIO, Li Auto, and Leapmotor. Traditional Chinese OEMs have also launched new EV-only brands such GAC’s Aion, Geely’s ZEEKR, and GWM’s Ora. These companies recognize that customers want their EVs to come from electric brands, dispensing of the baggage of association with ICEs and focusing on the future. There are some EV startups other than Tesla of note in the West, such as Rivian and Lucid, but none have successfully scaled production in the way Chinese brands have. Legacy OEMs are transitioning toward the EV future, repositioning some brands such as Stellantis’ Opel to electrify early. None, however, has been bold enough to scrap their hard-earned brands and start anew with all-electric brands. This leaves Tesla standing alone in the West as an EV-only OEM, challenged only by the Chinese brands that are now starting their push into Europe.

While Western car customers prefer the physical interfaces that they have become accustomed to, the generally younger Chinese car buyers have a love for smart features and high-tech innovation, which Chinese OEMs have responded to by focusing on intelligent cabins. This means that Tesla’s product range in China does not stand out as being exceptionally high-tech, and Chinese OEMs do not have to be as concerned about satisfying more traditional customers.

One advantage that Tesla does still have in China, though not as pronounced as elsewhere, is its low production costs. As its sales flagged in 2022, it launched a price war in China, which is still ongoing. Tesla took up to 21% off the price of some models overnight, forcing both Chinese and international OEMs to respond with their own discounts. This could be optimistically viewed as a proactive move to stamp out rivals, but more realistically is a defensive measure to shore up market share. While Tesla leads in the West, it is on the back foot in China.