Tesla China Fairy Tales For Bears & Bulls
What would a Tesla fairy tale in China look like? Well, that depends on whether you’re a Tesla bear or Tesla bull. Let’s have a look at two scenarios.
The Bears
The latest Tesla bear meme is that there is not enough market demand for the Gigafactory 3 (GF3) output, that it will be a financial debacle. They base this theory on two assumptions. First, they are estimating necessary investments at about twice the capex Tesla is actually spending. Second, this is based on unrealistically low electric vehicle market growth.
The bears think 2020 sales will “grow” to a level the market is already reaching in 2019, and in that depressed market, Model 3 sales will show very modest growth from the 13,400 of the first half of 2019. Never mind that those were imported Long Range AWD and Performance models and GF3 will produce SR+ models for a far lower price.
Why the $2 billion investment for the whole 500,000/year Models 3+Y factory is allocated to the first phase and its 150,000/year Model 3 capacity is a mystery to me. Need I mention that some bears use the $5 billion Wall Street estimate for GF3 investment instead?
The bears’ fairy tale is based on those numbers. For them, it reads 2020 bankwuptcy assured.
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The Bulls
The bulls see Tesla’s future in China differently.
After incentives to buy electric vehicles (EV) in a country are ended or lowered, the EV market often tanks. We have seen this happen in Hong Kong, Denmark, the Netherlands several times, and in the USA for Tesla in Q1 2019.
China ended most of its incentives after Q2 2019 and lowered some others. The market did not tank — the growth was reduced to only 3% after this in July. This is an EV market stronger than we can imagine.
Last year in 2018, the 30kWh, $25,000 BAIC EC-Series passed the 90,000 (8% market share) vehicle sales marker. In December, the bigger and more expensive EU-Series, $32,500 sold 12,500 units. The year ended with over 1.1 million EVs sold.
This year, the estimate is between 1.6 million and 2 million EV sales, a growth of 50% to 80%. Next year, in 2020, a conservative 40% growth estimate gives the market somewhere between 2.25m and 2.75m vehicle sales. For more information on the Chinese EV market and its development, read the articles by Jose Pontes on China.
The growth in China is no longer based on incentives. It now has a California-like mandate of increasing EV quotas on a yearly basis for all carmakers, or a requirement to buy the ZEV credits from others. The big carmakers in China (VW, GM, Ford, Toyota, Nissan) have not been producing EVs.
The EV market in China was provided with models from smaller Chinese companies and a lot of EV-only startups. A variant of the “let 100 flowers bloom” applied to industrial development. The weeding out of opportunistic incentive grabbers and amateur entrepreneurs who haven’t produced good enough cars has started.
When it became clear that their resistance was futile, all foreign carmakers in China have started building or converting factories to EV production. Tesla is just the latest to open a factory. For EVs, Tesla is also the most admired brand in China
The foreign brands, with mostly imported EVs, have only 6% of the Chinese market in 2016. Most incentives are only available to locally produced vehicles. Imported vehicles are seeing a 15% to 40% (Trumpian) tariff.
With a commercial disadvantage of this size, local production is a must. Tesla’s GF3 enters stage with loud applause of Tesla’s future Chinese clients.
This new factory has a lot going for it.
- GF3 is likely more efficient than Fremont.
- GF3 Depreciation & Amortization at 3,000/week is likely lower than the $2,000@5,000/week of Fremont.
- GF3 hourly wages are well below Fremont’s.
- GF3 needs fewer man-hours to produce a car.
This will result in lower “Cost Of Goods Sold” for the cars build at GF3.
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 (parking license, etc.) obtainable.
The recent exemption for the 10% special sales tax on cars is not exclusive for locally made cars any longer. It applies to imported models too. But I see a 30% lower price before incentives compared with the H1 2019 prices.
There is a lot of room to lower the price of the Chinese-produced Model 3 SR+ and still have far better margins than on the Fremont cars delivered in California.
150,000 in 2020 is between 5–7% of the fully electric vehicle market.
Looking at other markets with high EV market shares, like California, Norway, and Netherlands, that is not impossible
Tesla has to invest in the sales, service, and Supercharging infrastructure in China to reach those numbers.
Aiming at 150,000 Model 3 SR+ cars delivered in 2020 is ambitious, but not unrealistic.
This is by far the best Tesla market perspective anywhere, anytime. It is just a fairy tale for me.
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