(Bloomberg) — Tesla Inc. is coming to the end of its first year selling China-made cars with a commanding position in the world’s biggest electric-vehicle market, but Elon Musk shouldn’t rest on his laurels.While Tesla regularly topped monthly premium EV sales tallies this year, helped by the sedans churned out from its multibillion-dollar plant opened to much fanfare in Shanghai last December, 2020 was also marked by rivals catching up. In 2021, the breadth of the competitive attack that Tesla faces will be greater than ever.Whether Tesla can defend its lead in China will be key to its wider growth and earnings trajectory. While still in its infancy, China’s electric-car market dwarfs that of other countries and the government is intent on further expansion amid commitments to reduce fossil-fuel use. Tesla’s fate in China will also show whether it can grow into a truly global carmaker, an ambition investors are banking on after pushing the company’s shares up almost 700% this year.A trio of local champions Nio Inc., Xpeng Inc. and Li Auto Inc. has emerged as the front line against the Palo Alto, California-based company. All traded in the U.S., and enjoying backing from government entities or internet giants, the three startups are quickly winning fans, with sales of their electric SUVs, sedans and crossovers also rising in 2020 and their shares surging on Tesla’s coattails.“Since June, you’ve seen a steady rise in sales by Nio, Xpeng, and Li,” said Bill Russo, founder and chief executive officer of advisory firm Automobility Ltd. in Shanghai. “Can you stay competitive with these fast-moving, internet-backed, very deep-pocketed companies?”China is Tesla’s largest market after the U.S., with sales in Asia’s biggest economy topping 120,000 units this year, according to local registration data. And Tesla keeps ramping up production in Shanghai, prompting analysts to forecast that China will account for a bigger slice of its sales and earnings in the years ahead.The Model 3 sedans Tesla sells in China have higher profit margins than its vehicles in the U.S. and Europe, and China could make up more than 40% of Tesla’s sales by early 2022, Wedbush Securities analyst Dan Ives said in a Dec. 21 research note. That compares with about 20% now.“China could see eye-popping demand into 2021 and 2022 across the board with Tesla’s flagship giga 3 footprint a major competitive advantage,” he said, referring to the Shanghai plant.Expansion PushWaiting in the wings for Tesla is the Model Y, which Musk says has the potential to outsell all other vehicles it makes. The crossover is already being built in California, and a Shanghai-assembled version is clearing the final regulatory stages to start selling in China as soon as next year. Earlier in December, drone footage captured around 40 Model Y vehicles being driven out of the factory and wrapped in protective covers.“China will continue to fuel Tesla’s global growth in 2021, more so than ever,” Sharon Li, a JL Warren analyst, said in a recent note.The carmaker is also expanding its geographic footprint, recently opening multiple Tesla centers in China’s lower-tier cities including Weifang and Linyi in northeastern Shandong province. Meanwhile, it’s bolstering its public and government relations teams in smaller hubs including Shijiazhuang and Haikou, in addition to larger cities.Tesla is starting local production of chargers in Shanghai too, part of an effort to expand its charging network in more cities. The company recently completed its 500th super-charging station, marching toward an annual target of 650.Crowded FieldTrade group China Passenger Car Association predicts that Tesla will sell as many as 280,000 vehicles in the country next year. While that represents impressive growth over 2020, it would still leave more than 80% of the market up for grabs. PCA predicts total sales of 1.7 million new energy vehicles for 2021.That means local premium brands Nio, Xpeng and Li are increasingly a threat — combined, the three companies already approach Tesla’s monthly sales tally. SAIC-GM Wuling Automobile Co. and BYD Co., which sell less expensive electric cars, are also gaining momentum.Nio, the biggest of the Chinese trio, has steadily boosted sales of its electric SUVs that it sells at a price as much as 40% higher than Tesla’s Model 3. The company’s retail strategy includes clubhouses with showrooms, lounges, work spaces, theaters and even camp activities for customers’ children. A Tesla price cut earlier in the year added some pressure, but a subsequent reduction failed to have a similar impact, Nio CEO William Li said on a recent earnings call.“We didn’t see any specific impact on our order intake,” Li said. “This proves that we have our own unique advantages.”Xpeng similarly has seen brisk sales growth, helped by lower prices than Tesla’s. The company, which touts the smart features of its vehicles, raised $2.2 billion this month selling additional stock, capitalizing on a recent share-price surge.“I would call 2020 Year One of an intelligent electric-vehicle market in China,” Xpeng Vice Chairman Brian Gu said in a phone interview on Nov. 27. “We’re seeing really good sales of many good products.”Common EnemyBut Tesla and its Chinese rivals also face a common threat: conventional carmakers swiftly moving to electrified autos. Volkswagen AG plans to introduce eight ID series electric models in China by 2023, while Daimler AG, the maker of Mercedes-Benz luxury cars, has launched the EQC electric SUV and plans to expand its lineup of purely battery-powered vehicles to at least 10 in coming years. While their EV volumes in China are still small — they’ve yet to break into the Top 10 — the traditional giants have the advantage of vast dealership, service and supply-chain networks.China’s government, meanwhile, is doing its best to lure consumers and old-school automakers away from gas guzzlers with subsidies and restrictions. The target is to have NEVs account for 20% of the market by 2025, up from about 5% currently.Tesla will have its work cut out to ensure it’ll be among the beneficiaries of that push. Lu Bin, a fund manager at HSBC Bank (China) Co. and an early buyer of a China-built Model 3 sedan, said he opted for a roomier Li Auto model when he purchased a new EV in November. The range is better, plus the six-seater is more suitable for families.“Tesla had the early-mover advantage and has shown the way to consumers,” said Russo. “But now, there are more options.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.