SHANGHAI (BLOOMBERG) - Tesla's aspirations in China were dealt a major blow over the weekend after the government ordered that almost all the cars it has sold in the nation - more than 285,000 of them - be fixed to address a safety issue.

The State Administration for Market Regulation said in a statement on Saturday (June 26) that the action involves 211,256 locally produced Model 3 vehicles and 35,665 imported ones, as well as 38,599 China-made Model Ys.

The United States-based carmaker began deliveries of the Model Y sports-utility vehicle only in January, so the recall will affect pretty much every driver who bought one.

The Chinese agency said the vehicles' autopilot systems can be activated automatically, potentially leading to crashes from sudden acceleration.

In most cases, the fix should be able to be made remotely with an online update to the cars' active cruise control feature. Tesla will upgrade the software for free.

While Tesla apologised via its official customer support account on Weibo, saying that it will "continue to improve safety in strict accordance with national requirements", the recall tops a string of embarrassing setbacks for the company in China.

A protest that went viral at the Shanghai auto show in mid-April and a spate of crashes have soured public opinion towards the electric vehicle (EV) pioneer and a few local governments and official institutions are reviewing Tesla ownership among their staff, citing concerns the cars pose security risks.

In March, Teslas were banned from some military complexes and housing compounds because of worries about the in-built cameras.

Tesla immediately moved to reassure the authorities, saying any data collected in China is stored locally.

That the required software fix impacts Tesla's Model Y is especially unfortunate. The SUV crossover, which has a driving range of up to 594km, was seen as enabling Tesla to target a much bigger customer base in the world's biggest market for EVs and cars.

Chief executive officer Elon Musk has said the Model Y has the potential to outsell all other vehicles it makes and just this month, China's Passenger Car Association forecast increased interest in larger, roomier cars, particularly in the seven-seater category, as the government is allowing parents to have more children.

Credit Suisse Group said in a note last week that one key downside risk to its US$800 price target for Tesla stock is Model Y difficulties and a lack of demand in international markets.

Tesla's Nasdaq-traded shares closed on Friday at US$671.87 and are down about 5 per cent since January. They soared 743 per cent last year.

Tesla's delivery times at some locations in China "have declined from 39 to 33 days - potentially an indication of fewer orders converting to sales", Credit Suisse analyst Dan Levy wrote.

However, while some customers have switched brands due to recent negative headlines, "there are still ample Model Y orders to support continued sales volume", Mr Levy said.

Foreign brands accounted for about 37 per cent of new-energy vehicle sales in China last year and 57 per cent year-to-date.

The nation is Tesla's second most important market after the US. Tesla is now exporting China-made cars to Europe from its Shanghai Gigafactory. But a handful of fast-growing, home-grown upstarts threaten its strong position, particularly Nio and Xpeng.

In the mass market, local buyers are being won over by cheap, functional electric cars made by SAIC-GM-Wuling Automobile.

Sales of China-made Model Ys, which start from about US$53,000 (S$71,000), more than doubled in May from April. April's figures were down in March because some production lines at Tesla's Shanghai factory were suspended for two weeks for maintenance and adjustment.

"Once the Model Y gets to full production, we'll probably see a ratio of almost a 2-to-1" versus the Model 3 sedan, Mr Tu Le, the managing director of Beijing-based consultancy Sino Auto Insights, said earlier this month. "Chinese consumers love SUVs and crossovers. I think the Model Y is going to do really well towards the end of this year."