Tesla is on thin ice with Chinese regulators

Elon Musk has done a better job at selling and making cars in China in just two years than he has in the US over the past decade. As a foreign business, he’s also had a smooth ride with the authorities—until recently.

Last month, a Tesla Inc.ownerat the ShanghaiAuto Show protested the company byjumpingontothe roof of a Model 3 and allegingfaulty brakes hadlanded her father inthe hospital. Footage of the incident pitched the company intothe center of a Chinese social media storm. Thatcame just as the company announced blowout earnings in the country, with Chinacontributingaround 30% of revenues in the March quarter.It’s becomean ongoing saga, and regulators have now stepped in.

That’sa big deal for Tesla. A company that often treats the state with insolence is getting some of it own medicine. How Musk handles the issuewill determine his success, not just in China but around the world.

Tesla has long followed a strategy of keeping itshead down in China, shyingaway from making big proclamations about its operationsand regulators. On a first-quarter earnings call last week, executivesbarely mentioned the country and itsShanghai factory.

That strategyhasn't worked this time. After an initially dismissive response to the woman’s complaint and rebuke from state media, Tesla’slocal unit went into overdrive— apologizing,handing over driving data from theincident to regulators, andtrying to winpublic support.

“When the pressure was greatest, we felt the care and support of our drivers,"the company said in a statement quoted by local media outlet Caixinlast week. Symbols of support sent into dealerships —including bubble tea, desserts, and heartwarming words from fans —made their troubles “disappear,"Caixin paraphrased the statement as saying.

This emollient approachis in stark contrast to Tesla’s stancein the US. A Wall Street Journal article last week recorded a litany of high-handed and dismissive behavior in dealing with US regulators. When one called Musk overa 2018 crash investigation, the billionairehung up on him and said the company had withdrawn from the inquiry, the paper reported.

Tesla haspreventedhealth and safety officials from carrying out a full inspection of its Nevada battery plant for more than two years, according to the article. When the paper asked Musk to comment on its report,he replied with a “poop" emoji and declined toelaborate further. That wouldn't fly in China. But then again, Tesla’s born-again softerapproachisn’t going down too well either.

State media has actively waded in over the past week. One article noted the company “faced a reputational challenge." Another editorial said thatforeign-funded businesses in China “must treat Chinese consumers with sincerity if they are to win their hearts." A third addedthat Tesla “has learned a harsh lesson on what it takes to be successful in the Chinese market."

For Tesla, a setbackin China wouldn’t just putnearly a third of its revenues in jeopardy. It could alsorisk Musk’s bigger ambitions tobring down the price of electric cars.Production in Chinais key for export sales into Europe, fast becoming one of the largest green car markets.

Beijing is not shy about showingits disciplinarian side, especially when it comes to the private sector —as demonstrated by the way it’s brought Alibaba Group Holding Ltd.’s founder Jack Ma to heel in recent months, along with the rising pressure on other large tech companies in the country.

At the same time, there’s no doubt the relationship between Tesla and Beijing is mutually beneficial. China is counting on Tesla to rid the Made-in-China label of any lingering concerns about quality. Around 90% of the parts in the company’s vehicles producedin Shanghai are sourced domestically. Tesla should have known better than to behave as insouciantly in Chinaas it does in its home market. Even the best-behaved companies in China have to watch their step. If Musk doesn’tlearn from this episode, the repercussions could go well beyond Shanghai.