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Friday, Mar 05, 2021

Delivery day for Tesla’s multibillion-dollar China move, as Shanghai factory employees take first cars home

The electric-car maker handed over the first 15 Model 3 sedans assembled at its new plant to company employees. After what CEO Elon Musk described as a period of ‘production hell’, the carmaker’s stock has been on a tear, up 62 per cent since reporting a surprise profit in October

Tesla is about to find out whether the second time is the charm for Elon Musk making bold predictions about how many cars the company can build and sell.

The electric-car maker handed over the first 15 Model 3 sedans assembled at its new multibillion-dollar plant near Shanghai – its first outside the US – to company employees at the facility on Monday. Tesla took the same approach when it started production of the sedan in California in July 2017, delivering its first Model 3s to staff.

After reaching that milestone more than two years ago, Tesla went through months of what Musk called “production hell”. After consistently falling well short of its chief executive officer’s ambitious targets, the electric-car maker burned through billions of dollars and came within weeks of running out of money.

Investors have been betting this time will be different, with Tesla shares on a tear since the company reported a surprise quarterly profit in late October. The carmaker is on much steadier footing, having worked out the kinks that limited initial production of the Model 3 and managing to far outpace sales of many other carmakers’ electric vehicles. The China plant is already assembling more than 1,000 cars a week, and aims to double that rate over the next year, according to Song Gang, the manufacturing director at the facility.

Despite all the progress made, Musk still has his doubters. Jeffrey Osborne, an analyst at Cowen & Co., predicted Monday that Tesla would fall short of the low end of its delivery forecast for this year. He predicted the company would hand over about 101,000 vehicles in the fourth quarter, coming roughly 4,000 units short of its annual target for at least 360,000.

Tesla shares plunged as much as 4.9 per cent on Monday and traded down 4 per cent to $413.05 as of 11am in New York. The stock is still up about 62 per cent since the company reported third-quarter earnings on October 23.

Osborne, who rates Tesla the equivalent of a sell, was sceptical that demand for the Model 3 would continue at current rates. He was concerned consumers would be less interested in the car as subsidies drop in China and the Netherlands, and as a federal tax credit expires in the US.

“The large amount of over exuberance related to the demand for Tesla’s products in the mid to long term has increased over the past few months, and we believe much more successful penetration is baked into the stock than is likely to play out,” Osborne wrote in a report. “While Tesla has built a very dedicated fan base that has been willing to excuse poor build quality, customer service, and service infrastructure, we continue to be sceptical around broader adoption.”

Marriage Proposal

The dip in Tesla shares stands in stark contrast to the jubilant mood at the company’s ceremony to mark the first deliveries of Model 3s assembled near Shanghai. A crowd of about 200 people, including media and employees, gathered inside the plant to clap and cheer as Tom Zhu, Tesla’s head of Greater China, handed over the first cars. One employee receiving a car presented it to his girlfriend along with flowers and proposed to her. She accepted with a nod and they kissed.

More workers were expected receive vehicles over the next couple of days, with deliveries to customers to start in January, company officials said at the event.

The Chinese plant represents a cornerstone of Musk’s plans to make Tesla a truly global carmaker. The company last month announced plans to build a factory in Germany to cater to burgeoning European demand for electric vehicles.

The China plant could also help Musk build on recent momentum for the company in the world’s largest market both for EVs and autos in general. The Model 3 will compete with electric offering from local manufacturers including NIO and Xpeng Motors, as well as global companies such as BMW AG and Daimler AG.

Demand for Tesla’s locally built Model 3 is “very good”, and Tesla is confident it will sell all vehicles manufactured at the site, Allan Wang, general manager of Tesla China, said at the plant.

“Our aim is to kill all internal-combustion engine cars.”

NIO reported a narrower third-quarter loss than analysts estimated as demand for electric cars picked up . However, the struggling Chinese manufacturer remains far from profitability amid high costs with a net loss of US$342.9 million in the quarter through September.

Volume Goal

While deliveries to customers have not started, Monday’s milestone caps several months of wins for Musk. The latest came Friday, when the locally built car was included on a list of vehicles qualifying for an exemption from a 10 per cent purchase tax in China.

Tesla said in October the locally built Model 3 will be priced from about US$50,000. On top of the tax exemption announced Friday, the China-built model this month qualified for a government subsidy of as much as about 25,000 yuan (US$3,600) per vehicle.

Tesla’s original and for long its only car factory in Fremont, California, spent months trying to hit a 1,000 weekly rate. Musk has said a weekly production rate of 3,000 at the China plant is a target at some point.

The China factory broke ground at the start of this year. Originally just a muddy plot about a 90-minute drive away from Shanghai’s city centre, it is now a crucial test of Musk’s bid to prove Tesla can be consistently profitable.

As part of its China expansion, Tesla plans to add dozens of locations in the country over the next year for showcasing its vehicles and providing charging and other services, Xue Juncheng, director of China aftersales, said at the ceremony.

The company may lower the price of the locally assembled sedans by 20 per cent or more next year as it starts using more local components and reduces costs, people familiar with the matter have said.

About 30 per cent of the parts now used by the Shanghai facility are sourced locally, and the company plans to increase that to 100 per cent by the end of 2020, said Song, the manufacturing director.


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