The Tesla China “Fairy Tale” For Bulls Is Real — Here’s Why

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The other day, I wrote “Tesla China Fairy Tales For Bears & Bulls.” What the “Tesla bull fairy tale” would mean in reality for Tesla customers deserves some extra attention, so here’s a followup.

First a word of caution:

When GM brought the Bolt to production, the company used an underutilized existing production line and reached planned production levels 6-9 months later than planned. Who has forgotten Tesla’s Model 3 production hell? Audi converted a plant for its first EV by tearing it down to its foundation and rebuilding it. The e-tron encountered a 6-9 month delay reaching planned volumes. Mercedes was thought to be overly cautious by taking nearly a year for the EQC to reach volume production. After building 400 pre-production units, Volkswagen starts production of the ID.3 in early November, while deliveries start in the following summer, 6-8 months later.

The lesson: Bringing a new factory for battery electric vehicles (BEV) up to speed takes time, whether from a startup or an established automaker. Don’t expect a meaningful contribution from the Shanghai Tesla Gigafactory to Q4 2019 results. Reaching the full 3,000/week capacity before H2 2020 would be great.

Following this cautionary tale, back to the topic.

The previous article started with the destruction of the Tesla bear worldview that there is no viable market for BEVs, and especially not for the “overpriced junk from Tesla.” This was followed by a listing of Gigafactory 3 (GF3) and local production benefits.

First the benefits of local production versus production half a world away:

• No 15% import duty on the cars.
• No ~5% logistics costs to cross the Pacific.
• Chinese incentives obtainable, that are exclusive for locally produced cars.
• More Chinese perks (e.g., parking license) obtainable.

This new factory has a lot going for it. Not only are numerous lessons learned from building and debugging the Model 3 production line, but Tesla also has the opportunity to implement lessons into the product from a clean slate, implementing improvements not easily made in Fremont.

This results in a lot of advantages for cars built in Gigafactory 3 (GF3) Shanghai:

• GF3 is likely more efficient than Fremont.
• GF3 Depreciation & Amortization (D&A) is a lot less than in Fremont.
• GF3 hourly wages are far below Fremont’s.
• GF3 needs fewer man-hours to produce a car.
• Parts from Chinese and Asian suppliers encounter lower logistics costs and tariffs.

This will result in lower Cost Of Goods Sold (COGS) for the cars made at GF3.

This should be a boring paragraph with a lot of confusing numbers about tariffs, taxes, logistic costs, depreciation, capex, and R&D. More simply, it is just saying that a Model 3 made in Shanghai’s GF3 costs Tesla less money than the same car made in Fremont. Selling those cars in China could cost less than selling them in the USA.

In a previous article about the Chinese Tesla Model 3’s potential “super-margin,” I discuss how Tesla divided the difference in costs 50/50 between the company and the customers. It is about $8,000 per car less for the customers, and the same in extra margin for Tesla.

As support to bridge the time until GF3 can start delivering lower cost cars, the Chinese government has decided that foreign EV makers should be treated like domestic EV makers. The BEVs from foreign companies are now exempt from the extra sales tax on cars. Except all of the models from Tesla, this likely also applies to the BMW i3 imported from Europe, for example — not special for Tesla at all, just a generic adjustment of the tax laws.

This lowers the price for the Model 3 SR+ another ~$4,000. With the $8,000 discount for local production and all the incentives now available, the Model 3 SR+ becomes very competitive with the best selling Chinese models, which see a high number of sales and help make the Chinese EV market approximately as large as the EV market in the rest of the world combined. For more information on the Chinese competition, read our specialist Jose Pontes’ monthly articles about China.

With initially low production rates and still very high demand, these “super-margins” can cover most of the initial losses that every newly started factory incurs. Following that, GF3 should start contributing to the company bottom line in Q2 or Q3 2020. For those who hoped for a contribution in Q4 2019, note that contributing within a year is unbelievably fast.