Elon Musk's love-in with China may be over as regulators go after Tesla

Hong Kong(CNN Business) Elon Musk's Tesla spent the last couple of years trying to win over China in a bid to conquer the world's largest car market. Now the company risks upsetting Beijing's powerful regulators.

The electric carmaker has been summoned by five Chinese regulatory agencies to answer questions about the quality of its Shanghai-made Model 3 cars, according to a statement released Monday by the State Administration for Market Regulation (SAMR). It said regulators were concerned about several problems with the cars, including "abnormal acceleration" and "battery fires."

The meeting is troubling for Tesla. Thanks to Musk's courting of officials, Tesla had managed to avoid cumbersome restraints imposed on global rivals trying to do business in China. The company opened one of its massive car factories in 2019 to great fanfare in Shanghai, and the country now accounts for a fifth of its revenue.

But for the past few weeks, Tesla has been heavily criticized within China for a series of problems involving its cars, culminating in Monday's announcement.

"[We will] deeply reflect on the company's operational shortcomings and comprehensively strengthen self-inspection," Tesla said in a statement posted on Chinese social media website Weibo in response to SAMR's remarks.

"We will strictly abide by Chinese laws and regulations and always respect consumer rights," the carmaker said, adding that it will "better contribute to the healthy development of China's new energy vehicle market."

It's not clear whether regulators intend to punish Tesla or change anything about the way it operates in the country. But the controversy is a sign of just how seriously Beijing takes regulation, even among companies that it appears to favor.

"It's a slippery slope for Musk," said Dan Ives, a technology analyst at Wedbush Securities. The CEO "had built strong relationships within the country, but he must play nice in the sandbox in China."

Strong support

Tesla has been in China since 2013, but in the past few years it has established a strong relationship with the Chinese government.

When the carmaker was negotiating terms with authorities in 2017 for the construction of its Shanghai Gigafactory, it managed to retain complete control — an unusual arrangement, since its peers were typically required to partner with Chinese firms if they wanted to set up a local business at that time. (China announced in 2018 that it would ease up on the automotive sector's rules on foreign ownership by 2022.)

Since then, Tesla has enjoyed strong government support. It was the only foreign manufacturer without a local partner to win a big tax break for its cars in 2019. The company also resumed production quickly during the coronavirus pandemic in part thanks to local government support.

Musk has also won over authorities and Chinese citizens alike, and is a welcomed guest in the country. He famously danced on stage during the debut of the Shanghai-made Model 3 early last year, which went viral on Weibo. Premier Li Keqiang once even said he would be happy to give Musk a "China green card" after the American entrepreneur said he "loves China very much."

Tesla's inroads into China have paid off. The company sold $6.66 billion worth of cars in China last year, contributing 21% of its revenue, according to a recent company filing. That's more than doubled what it sold in 2019, when it had not yet started making cars there.

A souring perception

But in recent months, the perception of Tesla in China has begun to turn sour. Last November, state news agency Xinhua attacked the company after one of its attorneys wrote to US regulators about a recall in China, blaming "driver abuse."

"Tesla passed the buck to the Chinese users' driving habits and regulatory pressure," wrote Xinhua's Nan Chen in an opinion piece published in Liaowang, a magazine run by the news agency. "This kind of 'Tesla-style arrogance' can't be tolerated."

Criticism escalated last month after a video went viral in China that appeared to show a Tesla employee telling a customer that an overload in the state power grid caused a charging accident that damaged the car. A local branch of the power company in charge of the grid denied it was to blame, and told Tesla that it should "carefully find out the cause" of the car's problems.

Tesla wrote on its Weibo account last week that the video had been edited and that the employee provided "several possible factors" for the car's issues. Even so, the company apologized.

"We are deeply sorry, regarding the misunderstanding caused to netizens and the trouble" caused to power authorities, the company said.

State media outlets, though, piled on after the power grid incident. Xinhua earlier this month blasted Tesla once more for its "arrogant attitude," accusing the company of "passing the buck again."

The Global Times, a state-owned tabloid, also took the company to task.

"Though Tesla is arguably the US company most active in investing in China, the Silicon Valley-born carmaker is far from understanding Chinese consumers, as seen by its attitude in a series of scattered accident reports including explosions, drivers losing control and faulty brakes," read an article published by the Global Times.

Other challenges

Regulatory pressure is not Tesla's only challenge in China moving forward.

The company was the best-selling electric vehicle brand in the country last year, with 135,400 Model 3s sold, according to the China Passenger Car Association.

But competition is getting fierce. BYD unseated Tesla as China's top selling electric car brand last month, and other automakers like Nio, Geely and Xpeng are trying to close in.

While China has welcomed Tesla so far, experts point out that ultimately Beijing has its own ambitions to lead in tech and other fields. In other words: Once homegrown companies are competitive, the country doesn't have much need for foreign firms anymore.

-- CNN's Beijing bureau contributed to this report.