During a May 2014 conference call, Tesla (NASDAQ:TSLA) CEO and Chairman Mr. Elon Musk said the following regarding China demand:
"I think we'll actually have to limit the amount of cars we send to China; otherwise it would starve the rest of the world production."
"In other words, the single country of China alone has enough eager customers that could likely buy up all of Tesla's production."
In early July of this year, Barclays' Brian Johnson said that Tesla's China exports will be the quarterly bright spot. Yet, very strangely, there were no real sales numbers for China in the Q2 shareholder letter or quarterly conference call. Instead, there is just one paragraph with absolutely no numbers or facts, but just some wishes and hopes.
Model S is off to a very encouraging start in China, especially considering that we are delivering cars only in the areas around Beijing, Shanghai, Shenzhen and recently Hangzhou where we can assure customers of service coverage. We are planning to launch service and deliveries in many additional cities in the upcoming months, including Chengdu and Guangzhou. China has almost 10 times as many cities with more than 1 million people compared to the United States, so we believe the opportunity is substantial.
Since Tesla is already operating in China for a year now, we expected to see some real numbers, not just hear what Tesla believes. All we have got now is some evidence that Tesla imported 1543 cars into China during Q2 2014. Some of those cars could not clear customs as Tesla didn't fill in the VIN numbers correctly in customs declarations. These included the car of one person who was offered the floor model as a substitute, and so he went on to smash the car in anger. In the Q2 2014 earnings call, Mr. Musk attributed this mishap to delay in receiving the car. But it wasn't just caused by a long wait time. In fact, this customer was one of the earliest reservation holders in China who deserved to receive his car earliest as well. Rather, this was a result of Tesla's arbitrary order of delivery within the same market, and its mistakes in filling the customs paperwork correctly.
Some further facts are emerging as we go into Q3. Surprisingly, there were no Model S imports into China in whole of July! All those 2000+ cars that, at the end of Q2, were presumably on some ships to various foreign destinations, never showed up on any coast! July numbers for European countries are also in, and they are looking dismal; only 114 in Norway and 31 in Netherlands for example. Even U.S. deliveries in July sank to a recent low of mere 500 cars. Granted, a few hundred went to the UK and Hong Kong. But still, thousands of cars remain unaccounted for as of now.
I have long hypothesized that the initial shipments to China represent almost all of the pent up demand in the country. Since we don't see further imports of Model S (Correction: Later reports indicate 304 Model S imports into China in July), this hypothesis seems to be coming true. To validate this further, and see where China demand should be compared to U.S. demand, I recorded the Model X orders from TMC forum as below on various dates.
Model X Tally on various dates (Source: TMC forum)
These orders are a good way to gauge the true demand, as they are not constrained by the battery supply or production capacity, the most common reasons cited by Tesla for its tepid delivery growth. As you see, China demand is consistently around 14% of North American demand for Model X. We know that Tesla has cumulatively delivered around 27K Model S in N.A. Assuming the same ratio as Model X, that would peg the total China demand for Model S at around 3800. But it seems the arrival of Model X has eaten away part of that demand. In a desperate move to boost demand in China, Tesla recently started shipping to 38 cities and providing financing in China, despite their long standing stance that they first need to have a service center in a city before selling cars there. Tesla bulls are desperately looking for some signs of life in China market, but there appears to be none so far. Please see posts #386 and #387 here.
I know many bulls believe that Tesla CEO and Chairman Mr. Musk is infallible, and that he can grow a company forever. They need to take a peek at SpaceX, his other company. SpaceX very recently laid off over 200 people (about 10% of its workforce) without a sufficient notice period, violating California state laws. It is now being sued by its employees over that issue and other labor law violations. This link has some relevant discussions on this very quiet layoff at SpaceX.
Tesla has repeatedly claimed that demand for its flagship Model S product is insatiable in China, and Mr. Musk has said that he can grow the demand at will. However, when we look at the facts and data we have in hand, and analyze the company's actions thus far, it seems the demand in China is not as strong as Tesla had initially indicated. The positive catalysts, such as the waiving of sales tax for electric cars in China, the Chinese government initiatives for adoption of EVs and installation of more public chargers, will take a long time to show its effects on sales. It is doubtful, if these initiatives will improve Model S sales specifically.
Investors shouldn't be surprised to see low delivery numbers for China going forward. Just like SpaceX, there could be a sudden change in the mood and momentum for Tesla anytime in the near future.
Disclosure: The author is short TSLA. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Please use your own judgment for your investments, and check any suggestions implied here independently. The author is not responsible or liable for your financial decisions. This article is here only to put some facts in the right perspective.