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The shares of Tesla Inc. (TSLA) rallied Monday, but perhaps only because the first week of July was so terrible. This is certainly not because of his latest move to China
The electric vehicle manufacturer has increased the price of its Model S and Model X models in China by about 20% in response to tariffs that officially enter into force on Friday. Originally, Tesla significantly reduced the price of its Model X vehicle in China, as the country lowered its import tariffs on foreign vehicles. This was seen as a positive development for Tesla, as demand for electric vehicles continues to climb in China, the world's largest car market.
With lower import costs, this should theoretically stimulate demand. . However, with the entry into force of new tariffs, Tesla had to raise its prices. A standard X model now costs about 927,200 yuan, or about $ 141,000. This is quite the premium compared to the United States, where 75 kWh model 75 costs around $ 79,500.
For the 75 kWh S model, the Tesla website now says 849,900 yuan, or about $ 128,420. For comparison purposes, the base model S costs $ 74,500 in the United States. We are talking about a price difference. Chinese buyers pay more than $ 50,000 for the same model they can buy in the United States. Model X has a similar increase of more than 70%.
While the price increase of ~ 20% due to tariffs does not fix things, these two cars were not cheap to start. So what does this mean for the application? Just as lower car prices, due to lower import costs, should help boost demand, higher prices should weigh on demand. Even if it does not have much of a short-term impact, long-term demand should suffer if trade relations between the US and China do not improve.
For the record, approximately 17% of Tesla's total revenues in 2017 came from China.
Tesla plans to build a Gigafactory and assembly plant in China. This helps the country to abandon its obligation for builders to have a joint venture partner, which means that Tesla can own 100% of its Chinese business. Companies such as Ford Motor Co (F) and General Motors Co (GM) certainly can not say the same, although they seem quite satisfied with their current arrangement.
Given the demand for electric vehicles and the size of China as a whole, Tesla obviously wants to move there as fast as possible. But he must first tackle some of his current problems.
The first is to produce high quality models 3, at a rate of about 5,000 per week. If he can do it, he will produce about 250,000 units annually and it will take almost two years to work with a backlog of 420,000 units. This does not include Model S and X orders.
However, CEO Elon Musk still estimates that the automaker will be GAAP compliant and that cash flow will be positive in the third and fourth quarters. This will have to be realized so that Tesla can mobilize the capital it needs in 2019 to develop its Chinese operations and pursue several other projects (such as Model Y). Of course, Tesla could still raise capital without a profitable second half, but it will be able to do so with greater investor confidence and probably better conditions if it cleans up its financial position.
That said, there is an alert on Tesla's current obligations, which expire in 2025.
Even though Musk has been against raising capital, especially this year, optimistic cash estimates for the The second half of 2018 will not be enough to tackle the multiple projects that Tesla wants to pursue. This is not necessarily a bad thing, it's just the reality of the situation. As far as fares are concerned, they should be viewed as a net negative to Tesla's situation and make the need for a Chinese operating facility much more important. The question then becomes, when will Tesla move on the new Gigafactory and how much will it cost?
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