Tesla China Deliveries: Weaker And More Important Than You Think

Early reports of Tesla's "strong" Feb "sales" left out critical data, like Model 3 sunk like an anchor, as I expected, and Model Y pace may already be slowing. March now hit with major Covid outbreak.

China is experiencing its worst Covid-19 outbreak since the pandemic began in 2020, triggering lockdowns in the largest cities across the country.

The government is responding with the strongest restrictions in the hardest hit areas, including Shanghai, where Tesla runs arguably its most important factory, and Shenzhen, a vital manufacturing hub in the Guangdong province. Shanghai uthorities have curbed all social contact, closed schools, and prohibited citizens from leaving the city unless absolutely necesary. Shenzhen authorities have ordered “all businesses not involved with essential public services to suspend production or have employees work from home for a week starting Monday.”

This comes at a critical time for Tesla (TSLA), which generally sells most of its cars in the final month of every quarter. I also have projected Tesla has only a couple of quarters of relatively easy comps this year before potentially struggling to meet record results in the second half of last year:

Indications are that Tesla’s long stretch of luck and lavish indulgence may be coming to an end. Musk’s billions, brags, insults, and rants have overshadowed growing concerns that can’t be ignored for much longer, like struggling Model 3 same store sales trends I’ve been tracking for years. Like Tesla’s shrinking market share in key markets from robust competition winning buyers spooked by its own notoriously poor build quality in it cars plus its dismal customer service. Like eroding margins from seemingly inflated levels which likely will worsen through next year.

Add emerging consequences from Tesla’s notorious false and misleading full-self-driving (FSD) claims, sneaky “fixes” of serious problems instead of recalls as required, dicey accounting, increasingly significant recalls as years of shoddy manufacturing and apparent coverups are revealed, and escalating government probes may expose all manner of ugliness to the world.

I long have projected that many, if not all of these negative factors may begin to coalesce next year, particularly in the second half. If so, Tesla could struggle increasingly versus record results this year.

Look Away From Elon Musk To Gauge Tesla's Prospects—and Looming Risks, 12/31/21

There’s no room in Tesla’s still hefty stock for any weakness in any quarter this year, much less the first quarter. Tesla stock closed today at $766.37, down 27% ytd and down 38% versus its intraday peak at $1,243.29 last November.

And yet market projections for Tesla (TSLA) 2022 deliveries remain ambitious, with consensus at roughly 1.5 million deliveries (up 56%), slightly higher versus company guidance for 50% growth, to downright enthusiastic at 1.7 million (up 78%). Both are higher versus my 1.3 million estimate, especially in the second half which I have projected to be more challenging for Tesla versus record results last year (see that discussion in Tesla's China Syndrome Will Spread).

My previous first quarter estimate for deliveries at roughly 250,000 (up 35%) also trails market consensus as revised higher at 312,000 (up 69%). Market consensus also assumes deliveries exceed record fourth quarter results at 308,650, every quarter this year, ignoring even the normal seasonal pattern of slowing sales in the first quarter building to stronger results at yearend.

I remain skeptical. Before this latest potential hit to Tesla’s China sales, I was inclined to bump my first quarter number closer to 300,000 given the jump in EV appeal on spiking oil prices with Russia’s heinous attack on Ukraine. But I remained concerned that Tesla may fall short of market expectations.

Why? Mainly because, as I long have warned, Tesla has been losing ground to strong local competition in China—the world’s largest EV market by far.

China is vital to Tesla as its richest market with now 26% of revenue and most all of its pretax profits versus its still money losing US operations (see my report Will Tesla Get Good News This Week?). Tesla generated 38% of its total deliveries in China in the fourth quarter.

It’s momentum Tesla can ill afford to lose, but that is what happened again in February. Recall Tesla has only one model still growing incremental sales: Model Y which launched for local sales in China in January 2021 and started exporting to Europe in July 2021. And as I expected, this immediately decimated local sales of Model 3—a persistent pattern I have tracked for years:

Sales in Tesla’s legacy models have faded almost immediately when faced with its new models, and now Tesla is facing stiff new competition from strong rivals in all its markets—especially China. Its new models have also struggled to sustain sales after initial new launch and/or new market expansions even before the first anniversary of said events (I last discussed this at length in Tesla: Don’t Drive Angry, 2/8/21).
Tesla Model 3 Sales Crashed in China in October, 11/10/21

Model 3 local deliveries in China fell more than 66% y/y in February to 4,607 following the 78% y/y drop in January to just 2,988. That put first two-month results at 7,595, down 72% y/y and the lowest versus the same period in any quarter since Q1 2020.

At this rate Model 3 China deliveries need to top 31,500 for March—a new monthly record—just to match peak quarterly results of 39,139 generated for Q4 2021 when buyers were rushing to buy before subsidies dropped. Yet even this would fall well short of market estimates targeting more than 41,000 for the quarter.

This again leaves all the heavy lifting for Model Y, which still is ramping up sales incrementally versus last year. Except Model Y came up comparatively short in February at 18,593. That was up 302% versus nascent results last year, but down 20% versus the second month in the fourth quarter—a sudden and significant slowing in sales momentum. As a result, Model Y first two-month results at 34,951 are down 4% versus the same period in the fourth quarter. This means monthly Model Y deliveries need to hit a new record at 41,969 for March so first quarter deliveries can even meet Q421 results at 76,920. Even so, this still would trail market estimates by more than 15,000.

Moreover, Tesla’s deliveries remained under increasing pressure from robust local rivals even before March deliveries were threatened by new Covid lockdowns across China.

Here, for example, were the 15 top-selling EV sedans in China for February:

Chart by Moneyball @DKurac

Takeaways from this chart:

• Model 3 ranks well down the list at 7th place, reflecting its rapidly deteriorating market share.

• Model 3 is the only one with sales down—and it’s down by high double-digits.

• All its Chinese rivals report vibrant sales growth—and most all are brand new to the market versus Model 3 which is little changed since its launch in 2016.

• Model 3 deliveries have dropped by double-digits y/y in 7 of the last 10 quarters while most of its China-based rivals like BYD Co. have been logging triple-digit spikes in y/y deliveries.

• Even Model Y—Tesla’s only growth vehicle—would have ranked 3rd on this list.

This is largely because Tesla’s fleet is aging fast versus the rapidly evolving EV market. As I noted again in Will Tesla Get Good News This Week?:

Tesla’s fleet also is comparatively old. Model Y, launched in March 2020, is a slightly bigger Model 3 with a hatchback, and Model 3 was revealed in 2016. Model 3 was a smaller, notably spare version of the 2012 vintage Model S—with dramatically worse flaws and defects which Model Y share. The painfully flawed Model X, launched 2015, has always been substantially more problematic to build and maintain versus its comparatively modest sales contribution. Dozens of truly new EVs have been revealed and/or launched every year since 2016 with 2022 expected to be a particularly strong record year of new EVs to market.

Tesla doesn’t even move the needle on High-End EV Sedans sales, which remain significant, since Model S has virtually disappeared from the China market:

Chart by Moneyball @DKurac

Finally, Model Y—Tesla’s last trick pony. It still ranks well among high-end SUVs in China:

Chart by Moneyball @DKurac

But Model Y loses again in top EV SUV sales to BYD Co.—while several other new models months chew furhter into the gap:

Chart by Moneyball @DKurac

Note that Model 3 deliveries would have ranked 5th, and it would be only model with negative deliveries (down 66.3%).

It’s not surprising then that Tesla dropped to 3rd as its market share continued to slide. If this chart was ranked by y/y change, Tesla would drop to 12th place.

Chart by Moneyball @DKurac

Note how dominant are the leaders now ahead of Tesla, with significantly higher sales and y/y growth versus Tesla. Note also the substantially faster growing rivals nipping at its heels.

Next look at top 15 China OEM retail sales for February, which includes traditional ICE as well as EV sales—a more complete look at the competitive landscape. Telsa’s top EV competitors BYD, SAIC-GM-Wuling, Geely, Great Wall, and Chery also continue to rank as leading sellers overall, while Tesla doesn’t even make the list with 23,200 total sales in February.

Chart by Moneyball @DKurac

Remember that all of Tesla’s competitors in China are facing the same headwinds, and yet still are gaining ground and even surpassing Tesla in sales momentum. They are the biggest reason Tesla’s March monthly sales remain under pressure in China, with or without Covid lockdowns.

Tesla can’t afford to fall short in even one of its last easy quarterly comps. However, losing ground in China also means losing momentum with its most profitable revenue versus its money-losing US operations—a critical risk to projected profits for the year, as I have projected.

Stay tuned.

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Tesla repurchased its 5.3% senior notes in the third quarter of 2021 as I projected, though I doubt we’ve seen the last of Tesla as a bond issuer:

Now stay tuned for the second step I described: a quickly shopped, likely $2-4 billion inordinately low coupon bond deal, accompanied by a bump in credit quality ratings potentially to low investment grade (see Tesla's Car Business Finally Turned A Profit. Really. Time For A Big Bond Deal). It could even be appealing... if it’s priced at T+100 bps or better.

Until then, I have Tesla: Not Rated.

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