The electric Model 3 sedans rolling off the assembly line at Tesla’s Shanghai plant - its first outside the US - face a market where total vehicle sales are expected to fall for a third straight year.
After capturing about 5% of China’s car sales, electric vehicles have been losing steam as the economy cooled and the government scaled back subsidies for buyers.
That could spell trouble for a launch that investors are watching closely for evidence that Tesla has what it takes to go global. A slow start for sales of its made-in-China cars would put more pressure on the unprofitable manufacturer’s finances, giving Musk little room for missteps to support a stock that’s hovering at an all-time high.
"Tesla is rushing to start deliveries before other global brands bring in more EVs,” said Zhang Yan, an analyst at research firm LMC Automotive in Shanghai. "It’s an attempt to conquer the market.”
EV sales plunged 42% in China in November as the government handouts that lowered sticker prices receded significantly.
That means Musk and his team are looking at a market that’s very different from mid-2018, when the decision to build a Shanghai plant was announced. Back then, the industry’s sales were growing at a roughly 100% clip.
The tough market could mean that Tesla sells just 21,000 China-built Model 3s this year, according to LMC Automotive. That would qualify as a sluggish start given the Shanghai facility already builds more than 1,000 cars a week and plans to double production during the next year.
The forecast takes into account Tesla’s history of production delays, potential supply-chain constraints and the complexity of manufacturing high-quality cars at scale, LMC Automotive said.
Yet others are more optimistic.
Yale Zhang, managing director of Shanghai-based consultancy AutoForesight, said Tesla could sell about 100,000 Model 3 cars. Wang Lei, a Shanghai-based analyst for China International Capital Corp., said Tesla could sell a combined 120,000 Model 3 and Model Y vehicles.
Given Tesla’s volatile share price, investors will be hyperfocused on the Shanghai ramp-up.
Success in boosting China sales could propel Tesla to as high as US$500 a share, a Morgan Stanley analyst, Adam Jonas, said in a December note to clients. Tesla climbed to a record US$443.01 on Friday after rising 26% last year.
So far, the China project has gone smoothly. Musk’s visits helped the company get preferential bank loans and swift approvals for construction and manufacturing. And while the subsidies are being phased out, the locally built Model 3 still qualified for a sizable handout of as much as about $3,550 per car.
But success requires winning over the consumer.
A majority of China’s EV purchases - about 70%, according to Sanford C. Bernstein - so far have been to the government and "policy-direct” customers, including taxis, mobility services and other government-affiliated fleet operators. Such buyers typically forgo premium cars like Teslas in favor of cheaper, local models.
"It’s a distorted need,” said Robin Zhu, an analyst with Bernstein. "And the market won’t change much in the next two-to-three years.”
Cars that cost less than 100,000 yuan (US$14,300) make up more than half of EV sales in China, according to Bernstein. Tesla last week cut the starting price of the Model 3 to 323,800 yuan from 355,800 yuan -- a 9% reduction. Subsidies lower the starting price to 299,050 yuan.
"To paraphrase Elon Musk, demand may be insanely high, but people literally cannot afford to buy them,” Zhu said. - Bloomberg
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