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Tesla reports another profitable quarter with an eye on China

Written by Wency Chen Published on 

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Tesla increased Model 3 production capacity at its Shanghai Gigafactory to 250,000 units a year and it is building a new factory for its Model Y.

Tesla (NASDAQ: TSLA) on Wednesday reported solid financial results for the third quarter. It is the electric automaker’s fifth consecutive profitable quarter, with sales rising 40% year-on-year (YoY). China appears to be more crucial than ever in its global strategy, as production capacity and consumer demand are increasing.

Tesla’s automotive sales accounted for 91% of the USD 8.77 billion in total revenue. The net income attributable to common stockholders (GAAP) was USD 331 million, up 131% YoY. The company already reported that it produced just over 145,000 vehicles and delivered 139,300 vehicles during the quarter, a record-high. Tesla aims to deliver half a million vehicles in 2020. Its stock climbed 3.23% to USD 436.31 in the after-market.

China, the world’s biggest EV market, contributed to Tesla’s solid quarter. The company said that it increased Model 3 production capacity at its Shanghai Gigafactory to 250,000 units per year, half of the 500,000 units it produces at the Fremont factory.

In addition to meeting China’s domestic demands, Tesla will soon start exporting made-in-Shanghai Model 3 sedans to European countries, including Germany, France, and Switzerland, state-owned news outlet Xinhua Net reported on October 20.

Fending off competition from Chinese local EV makers, including Nio (NYSE: NIO), Xpeng (NYSE: XPEV), and Li Auto (NASDAQ: LI), Tesla has started a price war. At the beginning of this month, it cut the starting price of the Chinese-made Model 3 by about 8% from RMB 271,550 to RMB 249,900 (USD 37,499) after state subsidies, thanks to cheaper batteries and other supplies. This makes the Model 3 the lowest-priced premium mid-sized sedan in China—a segment that includes the Audi A4, BMW 3-Series, and Mercedes C-Class. When the Model 3 was first released last year, the original price was RMB 355,800 (USD 53,390).

The strategy is proving it right. In the first nine months of 2020, Tesla sold 79,900 units of the Model 3, surpassing Nio, WM Motor, Xpeng, and Li Auto.

Further room to drop

Compared to the American version, production costs of the Chinese Model 3 have dropped by 20% to 28%, CNN reported, citing Sofya Bakhta of the research firm Daxue Consulting. Ping An Securities calculated that if Tesla manages to assemble vehicles exclusively with China-made parts, while maintaining a gross profit margin of 25%, the price of the Model 3 could be reduced by about RMB 20,000 (USD 3,001) to RMB 30,000.

The declining price, however, is also irritating some Tesla owners in the Middle Kingdom, with some describing themselves as “garlic chive,” a slang word often used for people who are repeatedly deceived and exploited, especially by the government or in the stock market.

Numerous angry comments about recent price changes surfaced on social media. “The sales personnel urged me to take the car immediately, and the price dropped by 10% on the eighth day after I got the car,” a buyer responded to a Weibo post by Tesla China’s global VP Grace Tao Lin. “Is that the ‘better experience’ you want to provide to your customers?”

On October 12, Tesla had to deny a rumor saying that the price of Model 3 will drop to RMB 199,000, via its Weibo account.

Tesla is currently building a new factory for the Model Y SUV in Shanghai which it expects to start delivering from next year.

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