October 25, 2019 / 3:24 AM / 21 days ago

Breakingviews - Tesla’s China strategy is upside-down

A gigafactory of electric carmaker Tesla Inc is seen in Shanghai, China October 18, 2019. REUTERS/Aly Song

HONG KONG (Reuters Breakingviews) - Investors were chirpy after electric-car maker Tesla unveiled an unexpected profit for the third quarter. It also said its Shanghai factory is almost ready, putting icing on the cake. But founder Elon Musk has over-promised before, and there are questions about his China strategy. Traders who added almost a fifth to the company’s market value on Thursday could use a pinch of salt.

The $143 million net profit reported on Wednesday marked a welcome change from last quarter’s $408 million loss, and shares popped 18% the following day. But the outperformance reflected cost cuts, not growing sales; automotive revenue fell 12% from a year earlier.

The new China factory could deliver a much-needed boost to volumes. It might take a while, though. Trial production is underway in Shanghai, but that only marks the end of the beginning. Final government approvals are still pending. Musk wants the facility to eventually produce almost a third of the 500,000 Model 3 units Tesla plans to churn out every year globally, but the initial production target is 1,000 units a week.

The company notes that deliveries of premium sedans in the People’s Republic outstripped both North America and Europe last year. But that glosses over another inconvenient truth: the market is in the midst of an historic downturn. The China Association of Automobile Manufacturers expects overall sales to drop 5% this year. At the same time Beijing is winding down subsidies for new energy vehicles. Sales of electric autos fell by a third in September compared with the same month in 2018. There could be worse to come: new policies seem to favour hybrids, according to analysts at Bernstein.

Tesla’s earlier models are aimed at wealthy consumers, which is good because that segment remains a bright spot in China. But Musk’s “Master Plan, Part Deux”, calls for “an affordable, high volume car” to take up most of the Shanghai plant’s capacity. The Model 3 is pricier than many Chinese rival’s electric cars, but it is less exclusive nevertheless. This could tarnish the brand’s appeal to well-heeled mainlanders, while being too expensive for ordinary buyers.  It’s possible the Model 3 could be an instant hit in the People’s Republic. That would be a surprise too.

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