China Update: Tesla's Prospects
a precis of an article published yesterday on SeekingAlpha
How will Tesla fare in China this year? That’s critical to them as a company, because Tesla’s Shanghai plant accounts for half of global output. My quick conclusion: it won’t be a good year.
You can read the article at SeekingAlpha. However, it’s behind a paywall, and in fairness I provide some of my key points below but don’t provide the details and evidence.
First, it’s payback time for the national new-for-old sales incentive (which also applied to an array of consumer products). The program was supposed to roll off at the end of 2024, so people rushed to purchase cars prior to December 31st. Of course the wider economy continues to be bogged down by falling real estate prices, the new-for-old program was one of the bright spots in the economy. As it happens, by mid-January the government in Beijing had extended the program for another year, as did provinces that had topped it up with additional local incentives.
Second, while the Model Y refresh is launching, it’s a refresh and not a new vehicle. The Model 3 refresh helped preserve sales, but it didn’t allow prices to be maintained. Against widespread discounting – the average is over $6,000 off sticker – Tesla now offers 5 years of 0% financing and 元8,000 in cash (as an insurance subsidy), plus it qualifies for new-for-old incentives. The Model Y refresh will help maintain domestic sales, but will only boost prices for a short time. Meanwhile, exports account for a quarter of Shanghai’s output, with Europe a major market. Those are set to fall. So Tesla will have a hard time maintaining capacity utilization. Oh, car companies continue to launch new EVs and PHEVs at a torrid pace, and have caught up or bettered Tesla in technology and costs.
Third, driver assist systems are the next big thing for cars in China. Tesla’s FSD is meh, including the upgrade launched yesterday (https://www.autonews.com/tesla/ane-tesla-navigation-update-china-0225/). In the article I discuss autonomous driving races; Tesla is in the bottom of the pack. Rivals, however, are bundling comparable systems, not charging a premium. Sooner rather than later Tesla will have to offer FSD for free, to match the competition. (I have not tried to track down take rates for Tesla’s ADAS packages in China.)
Finally, there’s politics. Tesla has been a favorite son in Shanghai, providing jobs and profits and the occasional photo opps for politicians with Musk. Since the Shanghai plant is integral to Tesla, not a standalone operation, there was only downside from interfering. However, with Musk buying his way into Trump’s inner circle, that calculus has changed. Xi Jinping is an experienced political infighter, and knows how to spot ways to leverage things in his favor. Now they can chop tens of billions off Musk’s fortune if he does not help them in Washington on trade and other issues. That’s a huge risk for shareholders.