A customer tries out a Model 3 at a showroom in Shanghai. (Image credit: Yu Dingzhang/TechNode)

When Tesla announced last month that it was planning to close “many” of its retail outlets around the world in favor of online sales, some industry watchers in China were left scratching their heads.

After all, in the world’s largest market for new cars, brick-and-mortar car dealerships play several vital roles, including where many first-time car buyers come to learn about driving. Perhaps more than any other major market, dealerships in China are still a place for consumers to come kick the tires, touch upholstery, and get up to speed about the vehicle they are planning to buy.

On March 10, Tesla largely reversed its earlier decision to shutter stores, saying that it would keep many more than originally planned.

But there’s a catch: To compensate for the less-than-planned cost savings, the company also announced it would pass some of the costs on to consumers, raising vehicle prices globally by around 3% on average, beginning March 18.

In China, Tesla currently runs 40 retail stores and 24 service centers, according to the company’s website. Now the company says it will retain some retail stores in high-traffic locations, a spokeswoman for the luxury brand in China told TechNode. She declined to provide specifics.

Wei Lanfang, a salesperson at Tesla’s first Shanghai showroom located in the city’s glitzy Xintiandi shopping district, told TechNode she also wasn’t aware of the details.

“We don’t know which stores will be closed, but will act in line with company’s new regulations updated next quarter,” she said.

Feng Shiming, an automotive analyst with Shanghai Menutor Consulting, stressed the importance of physical stores for auto buyers in China. “Retail stores serve as advertisements, which is important in China to attract customers and keep them informed,” Feng said.

Yale Zhang, managing director of Shanghai-based auto consultancy Automotive Foresight told TechNode that as a relative newcomer to the Chinese car market, Tesla has the “luxury” to cut the number of its outlets in China because, unlike other foreign luxury carmakers, the company wasn’t entangled in a broad network of expensive dealerships. “Many luxury automakers would want to do that, but they couldn’t,” said Zhang.

Even if other auto brands say that online ordering of their vehicles is possible in China, it was all “fake,” added Zhang. “In the end, they have to go through their dealers,” he said.

“I honestly don’t think [Tesla] need [the stores],” he added. “One per city is enough. Then they can put the money to building out their service network.”

While some of the storefronts in China have been spared, it’s unclear how the 3% price hike will affect Tesla’s performance in the country.

Recent events suggest that, like auto buyers elsewhere, Chinese buyers are sensitive to price fluctuations. After slashing prices across its Chinese range on March 1, Tesla faced anger from earlier customers who had paid the higher prices and wanted compensation.

Wei, the Shanghai salesperson, said that the company had yet to reach a resolution with customers seeking price-matching compensation and that there had been an increased number of buyers coming to the showroom beginning last week.

Tesla’s China revenues declined 13.3% year-on-year in 2018. The US-based electric vehicle manufacturer has secured a loan for up to RMB 3.5 billion ($521 million) from Chinese lenders to fund its Shanghai plant, which is scheduled to start producing its Model 3 vehicles by the end of 2019.

With contributions from Colum Murphy. 

Dingzhang is an intern reporter based in Shanghai. He is fascinated with China's tech landscapes and is also interested in data journalism. Contact him via yudingzhang.robin@gmail.com.

Managing Editor, Technode.

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