This is not investment advice. The author has no position in any of the stocks mentioned. Wccftech.com has a disclosure and ethics policy.
Tesla has just announced that they are slashing prices for both its Model X SUV and its Model S Sedan cars in China as a result of steep Chinese import duties. The move signals a reversal in strategy for the Palo Alto-based EV maker, as just earlier this year Tesla raised prices in the Chinese domestic market.
Increased China tariffs hurts Tesla and their plans for expansion into the Chinese market
The price cut means Tesla (NASDAQ:TSLA) will be absorbing a portion of the tariffs in order to help keep its vehicles looking attractive to prospective Chinese buyers. Things went awry for the automaker earlier this year as it was planning on making a huge push for the Chinese market - tariffs were 25 percent on imported U.S. cars, and Tesla was expecting a drop to 15 percent.
Unfortunately things don't always go the way they're expected to; enter U.S. president Trump and his namesake tariff war on China. We've covered the build up and roll-out extensively here on the Wccftech.com Finance column, and regular readers will know that instead of a reduction, China chose to fight back by increasing their import duties on vehicles from 25 percent to 40 percent.
The timing couldn't be any worse. Tesla is under siege in China, as home-market competitors like BYD are rapidly expanding both their production volumes and their technology as well. BYD, stated to mean 'Build Your Dreams', is selling nearly 20,000 plug in hybrids a month and this figure is ever-increasing. In fact, BYD has built more electric and plug-in hybrids than anyone else in the world for over three years in a row.
BYD also is somewhat unique in China as they are privately owned, and familiar investment titan Warren Buffet owns a 10 percent stake in the company.
Now the company is forced to slash its prices by as much as 23 percent to help keep itself competitive. We discussed this very real possibility back in April of this year.
This will come as a direct hit to margins, and while possibly increasing revenue from increased sales, it will hurt their numbers in the short term in China. Keep in mind that in 2017, Tesla sold over 16,000 vehicles in China, 16 percent of their global sales volume, good for over $2 billion USD for that same sales year.
All this comes at a challenging time for any automaker in China. September saw a massive 11.6 percent drop in overall Chinese auto sales which was the largest drop for that market in over seven years.
In order to put up a fight against BYD and others, Tesla has got to be able to manage its cost structure, and their Chinese factory will be tantamount to that goal.
CEO Elon Musk isn't backing down, and has instructed his company to even accelerate plans for its upcoming Shanghai facility:
“In addition, Tesla continues to lack access to cash incentives available to locally produced electric vehicles in China that are typically around 15% of MSRP or more. Taking ocean transport costs and import tariffs into account, Tesla is now operating at a 55% to 60% cost disadvantage compared to the exact same car locally produced in China. This makes for a challenging competitive environment, given that China is by far the largest market for electric vehicles. To address this issue, we are accelerating construction of our Shanghai factory, which we expect to be a capital efficient and rapid build out, using many lessons learned from the Model 3 ramp in North America.”
We'll be eagerly awaiting Tesla's next quarterly earnings statement to get a feel for how these new price cuts will affect Tesla's overall profitability.
