Tesla's Troubles in China Are Heating Up
Confusing reports about Tesla curtailing expansion plans have a surprising connection to plunging deliveries in China which threaten its prospects for revenue & profits—and a potential bond refi.
Reuter’s reported on Tuesday that Tesla (TSLA) has “halted plans to buy land to expand its Shanghai plant and make it a global export hub.”
While the market chewed over that, China’s Passenger Car Association reported that Tesla’s monthly Made-In-China (MIC) deliveries dropped 27% in April versus March.
And that Tesla exported 21% more of those cars than it sold locally in China.
Now that is a big problem, one I’ve been tracking for more than six months. And it seems to be getting worse—as I projected.
The Bigger Story
Reuters said Tesla was curtailing its global expansion plans because of heightened tensions over trade disputes between the US and China.
Except said trade tensions actually worsened when Trump invoked the first of several rounds of tariffs against China back in 2018, before Tesla built its auto assembly factory in Shanghai in 2019 (see my report Tesla: Shanghai Surprise on 1/29/19. And even then Tesla never intended to import its MIC cars to the US. So this take in the Reuters story seems hard to believe.
But Reuters also noted that “Tesla had never declared an intention to acquire the land" and it says it has enough land at its Shanghai factory across the street. Tesla already has built out 450,000 cars/year capacity at the Shanghai plant of its planned 500,000 cars/year near term goal, with 1 million cars/year capacity projected by the end of the decade by CEO Elon Musk in June 2019.
Tesla’s new take is interesting, because it seems to confirm my concern that its current production capacity in China may exceed demand, which I first raised in Tesla: Shanghai Surprise in January 2019 and revisited again last October (see What’s Going On With Tesla’s Demand? on 10/27/20). That’s when Tesla started exporting excess MIC Model 3s to Europe only a year after Elon Musk had boasted Tesla would need to build several factories in China to meet expected demand there.
That, as I expected, has not happened. The car business, even the hot EV market, is still a zero-sum game and Tesla has been losing market share in China for months to strong local rivals, with more coming (see Tesla: Don't Drive Angry on 2/8/21).
All this comes just as Tesla is losing most of its revenue from energy credit sales, the primary source of all its operating profits and cash flow (see Tesla: So Long, Free Money, on 5/6/21).
One major consequence—of many I have projected—could be:
Tesla could scale back its ambitious expansion plans and further delay already long overdue new model launches and the controversial redesigns of the stalled Models S & X (discussed in Tesla Reports Solid Beat With Strong Q121 Deliveries, But… on 4/4/21). If so, this could slash already ambitious targets from Tesla and market consensus for revenue and profits for 2020 and beyond, throwing ice water on Tesla's falling but still exorbitant market cap of $640 billion as of today.
Tesla: So Long, Free Money, on 5/6/21).
Breaking Down the Numbers
Tesla’s sales were hit hard in April. China’s Passenger Car Association reported total deliveries fell 27% to 25,845 versus the peak in March.
A bigger surprise, as it turned out, was that this was the wholesale number, which included exports as well as local retail sales. Excluding 14,174 MIC Model 3s exported to other markets, deliveries fell 67% to just 11,671—the lowest since September.
This called into question how monthly delivery numbers have been reported previously, and raises the risk that exported cars may have been double-counted in reports as sold in China and in Europe, for example, where most of Tesla’s MIC exports go.
If so, this would have substantially overstated Tesla’s already strained demand strength in China.
Either way, Tesla’s sales were dramatically weaker, again, versus China’s EV market overall which logged a more modest 8.9% monthly decline versus March.
Model Y deliveries were 5,407, down 47% versus March. The explanation was that production was down for 2 weeks, reportedly for some kind of equipment upgrade, so sales were supply constrained. We’ll see. In any case, the implied 9,000 run rate for the month still indicated a decline of more than 10% versus March.
Model 3 deliveries, excluding exports, were troublingly low at 6,264—down 75% versus March and the lowest since April 2020 (which had fallen 59% vs March 2020).
This is even more troubling since, as I have warned, the first quarter of 2021 was the last easy comp versus last year when COVID-19 first hit. Moreover, we can already see Model Y outselling Model 3 in the US and probably also in China just three months after its launch there (following a whopping 31% price cut; see Tesla: Don't Drive Angry on 2/8/21).
This continues the pattern I have tracked with all of Tesla’s models in all its major markets since 2018: sales in existing models fall immediately upon the launch of the new model and never recover previous momentum.
Self inflicted pain
Tesla has been losing ground for years against its own new models as well as fierce competition developing in every major market in the world, pressure which I expect will accelerate for another 2-3 years or more as dozens of new models roll out from every major automaker versus its own meager and long delayed pipeline mostly comprising the CyberTruck, the Semi-Truck, the Roadster, and maybe a compact-style version of the Model 3 for the China market.
Tesla exacerbates its problems with its long and notorious track record of poor quality and reliability with all its cars, which make its cars more expensive to repair and insure versus competitors, and even worse customer service (see my latest on this in Tesla: Oh No You Didn’t on 1/28/29). Top this off with Elon Musk’s storied arrogance, reflected in kind at Tesla as the company refuses to admit or even acknowledge its problems and mistakes.
This has played particularly badly in China, where Tesla has blundered every step of the way using the same dubious tactics it is known for in the US. Like getting caught in January 2019 selling its freshly launched MIC Model 3 with older, slower 2.5 version processors used in Autopilot versus the 3.0 chip buyers thought they were getting. Add typically poor service, troubling and potentially dangerous defects in its cars and unexplained crashes, disingenuous observance and even disregard of government requirements, and multiple rounds of forced major recalls, and it’s no surprise that Tesla has been summoned more than once before China regulators and multiple government agencies. Worse, Tesla hasn’t improved after being dressed down, as far as China buyers and regulators are concerned.
Meanwhile, Tesla’s April monthly deliveries in Europe seem to be tracking even weaker than China.
All this suggests Tesla is squandering the few remaining months it has left of any decided market advantage before:
its profits from energy credit sales dry up, and
its biggest competitors regain traction from the global chip shortage impairing their production and sales capacity, and
the second half of the year kicks in with tougher comps versus stronger quarters last year as Shanghai ramped up, as the Model Y began to take hold, and as economic malaise from pandemic disruptions began to ease,
and before dozens of new and exciting and likely far more reliable models are launched by more credible and reliably supportive automakers,
as I have discussed in Tesla: So Long, Free Money on 5/6/21 and Tesla Goes To Record Extremes To Create Q1 "Profit" on 4/28/21 and We're Not Surprised Tesla has Quietly Delayed Deliveries of "Refreshed" Models S & X on 4/7/21.
At least Elon Musk is still the richest man on the planet on most days, though Tesla stock is down 34% to $590 versus its peak in January. And he is the self-proclaimed DogeFather and pumper of DogeCoin. And he got that gig hosting SNL.
Tesla's 5.3% senior notes due 2025 are little changed since my last report and continue to trade near the call price at 103.7 (1% ytw; 89 bps). This offers no credible upside, particularly given good odds that the bonds get refinanced soon and likely at an inordinately cheap, unappealing yield. There’s perhaps 5 points or more in downside risk in the old or refinanced bonds if Tesla’s operations & financial condition deteriorate as I expect. The bonds remain excessively valued versus, for example, even the BoA High Yield general index yield of 4.31% as Tesla is a weak B3/BB- issuer with “CCC” quality metrics on its underlying core profitability and leverage. Maintain "Underperform."
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