Tesla China: As Good As It Gets?

Jan. 19, 2022 3:09 PM ETTesla, Inc. (TSLA)749 Comments
Mike Smitka profile picture
Mike Smitka
309 Followers

Summary

  • Tesla's CY2021 sales of 321,145 units are stellar, bolstered by December sales of 70,602 units.
  • The good news is that the Model Y is holding onto its share in the "midsized SUV" segment, and that segment expanded 3.5x in 2021. CY2022 should be good.
  • The bad news is that the Model 3 lost share in the "B" sedan segment throughout 2021, and that segment grew the slowest in 2021.
  • With no new models until 2023 or later, CY2022 is as good as it gets.

Tesla Shanghai Gigafactory

Xiaolu Chu/Getty Images News

Context

I'm an economist and so my training is to ignore headlines and look at data. While battery electric vehicle sales are growing rapidly in the US, that is from a low base. The name of the game is the EU and China, both of which provide substantial direct and indirect subsidies, including strict mandates to lower CO2 emissions.

For Tesla's (NASDAQ:TSLA) CY2021 sales in China, the headlines are undeniably good. When I dive into the numbers, however, the story is no longer rosy. It's not bad, it's just that there is little prospect for growth, while the investment story ($1,037 a share) depends on unlimited upside.

For Tesla, it's unfortunately necessary to wait for end-of-quarter data, because exports from China to Europe are front-loaded in the quarter, and domestic deliveries delayed to the last month. The Model 3 illustrates that, with a mere 422 deliveries in October 2021, but 30,102 in December. Model Y sales behave similarly, albeit with smaller swings. Full model-level monthly data are now available for 2021, hence this article.

Below I provide overviews of Chinese sales of the Model Y and the Model 3. I follow this with tables of data, for those who want the details. I answer the query of my title in the concluding section.

Note that I focus on demand, not supply. Tesla in its corporate announcements combines exports from China with domestic sales. For the Model 3, in 2021H2 Tesla exported 91,215 units or 58% of "sales" of 157,384. In contrast, fewer Model Ys were exported, at 30,025 units or 20% of "sales" of 153,951.

When the Berlin factory is completed, Tesla will become a "normal" car company, making where it sells in volume. At that point Tesla will need to either reduce Model 3 production, or find a way to sell 15,000 more a month. In contrast, exports of the Model Y are only 5,000 a month, probably not a problem given its market segment.

Model Y: The Good News

The good news lies with the Model Y. Sales are gaining traction, up from 16,422 in 2021Q1, when sales began, to 76,920 in 2021Q4. It helps that the Model Y is in the rapidly growing mid-sized SUV segment, which expanded 3.5-fold from Q1 to Q4.

That growth, however, reflects the rise of competition. Since March 2021 we've seen the launch of 7 competitive BEV models. As a result, in December sales included 19 BEV models and 9 PHEVs. These include the NIO ES6 (4,939 sales in December), the FAW Benteng "Nat" (6,890 sales, up 10-fold over November) and the BYD Tang DM PHEV (8,700 sales). Clearly, on average Chinese consumers cross-shop, and within the segment, one in five opt for a PHEV. The Model Y's share is stable, at 44% in both Q3 and Q4. As long as the segment increases rapidly, sales will increase even with a loss of share.

Model 3: The Bad News

In contrast, the Model 3 is in the slowest-growing segment, for either EVs or PHEVs. Within the segment it lost share each quarter. Absolute sales in fact peaked in 2020Q4 at 57,551 units, 47% above 2021Q4 sales, and are below 2020Q1. The numbers provide no support that 2022 will be better.

Data: The Details

The first table provides quarterly sales and segment information for the Model 3 and the Model Y. The second set of tables provides segment level data, for combined NEV sales. I follow that with a similar table for pure BEV sales, but for brevity don't provide a comparable table for PHEVs. I ignore fuel-cell vehicles, which have minimal sales. I delete the smallest segments to keep the tables compact. I highlight the midsized sedan segment (of the Model 3) and the midsized SUV segment (of the Model Y) in bold. The rightmost columns give segment share and Q4/Q1 growth rates. Totals include the smaller segments that I don't detail.

Tesla sales

CY2021

Q4

Q3

Q2

Q1

Model 3

151,039

39,139

27,030

31,987

52,883

"B" segment

260,348

84,068

54,302

54,004

67,974

Model 3 share

58%

47%

50%

59%

78%

CY2021

Q4

Q3

Q2

Q1

Model Y

170,106

76,920

47,006

29,758

16,422

Midsized Segment

411,256

180,151

108,872

72,439

49,794

Model Y share

41%

43%

43%

41%

33%

NEV sales by segment

All NEVs

2021

Q4

Q3

Q2

Q1

2021 Share

Growth Q4/Q1

Sedan

Mini

855,510

307,642

229,623

165,994

152,251

28%

2.0x

Subcompact

185,744

88,057

43,604

30,337

23,746

6%

3.7x

Compact

517,724

212,004

150,673

100,830

54,217

17%

3.9x

Midsized

260,202

83,922

54,302

54,004

67,974

8%

1.2x

Large

160,152

54,482

37,637

32,754

35,279

5%

1.5x

SUV

Subcompact

168,157

75,548

46,398

27,826

18,385

5%

4.1x

Compact

391,511

160,298

114,072

72,027

45,114

13%

3.6x

Midsized

405,849

175,957

107,659

72,439

49,794

13%

3.5x

Large

137,289

56,568

38,993

23,975

17,753

4%

3.2x

Total

3,092,589

1,217,674

824,818

582,540

467,557

100%

2.6x

BEV sales

EVs

2021

Q4

Q3

Q2

Q1

2021 Share

Growth Q4/Q1

Sedan

Mini

855,510

307,642

229,623

165,994

152,251

33%

2.0x

Subcompact

185,744

88,057

43,604

30,337

23,746

7%

3.7x

Compact

380,529

154,737

107,542

74,870

43,380

14%

3.6x

Midsized

234,726

76,931

49,470

47,424

60,901

9%

1.3x

SUV

Subcompact

156,263

70,833

42,424

25,136

17,870

6%

4.0x

Compact

253,516

99,579

70,339

49,411

34,187

10%

2.9x

Midsized

328,529

140,722

87,654

59,851

40,302

13%

3.5x

Large

131,882

52,374

37,780

23,975

17,753

5%

3.0x

Total

2,624,338

1,022,680

690,194

496,676

414,788

100%

2.5x

Data source: Gasgoo and other Chinese-language web sites

Conclusion

There are many red flags for the Chinese vehicle market, including NEVs. First there's the secular slowdown of the Chinese economy. The working age population continues to decline, and migration has emptied out the countryside, so the movement from farm to city no longer provides relief. Services such as healthcare are dependent on local government, but China grants no tax autonomy to municipal governments. With no independent fiscal base, they have relied on land sales. That is not sustainable, highlighted by the bankruptcy of Evergrande. The flip side is that households need to save for old age, and muting consumption growth. Expansion has depended on public investment, and that gravy train is at its end.

These headwinds aren't temporary, but will continue into 2022 and beyond. Critically for Tesla, aggregate vehicle sales peaked in 2017. So while the share of NEVs increased sharply in 2021, that will sooner rather than later interact with the shrinking overall market.

Then there is the drop in central government NEV subsidies, which go to nil in 2023. In addition, most larger NEV sales are in China's biggest metropolitan areas, the Tier I and Tier II cities. To date NEVs have benefited from exemptions from urban congestion restrictions and have favored access to license plants - in Shanghai the latter is equivalent to a US$14,000 subsidy. Such policies are no longer sustainable, with NEV sales topped 50% of the market in Shanghai in December. Local governments will perforce pare policies favoring NEVs. Finally, lithium prices are pushing up battery prices. Makers can partially offset by switching to less expensive LFP batteries, but at a loss of performance and range. That is a dangerous path for Tesla to tread.

Now I expect the Model Y to continue doing well, seeing higher sales through the summer. But by 2023 growing competition will eat into sales in absolute terms.

The Model 3 is over 4 years old. At this point up-front development costs should be fully amortized, and a portion of the capital costs for Shanghai will have been written off. Tesla may thereby have room to discount once production in Berlin commences and exports decline. That may not happen anytime soon, according to Jaberwock Research's Jan 12 SA article Tesla Brandenburg (TSLA): Volume Production Is Still Months Away. I believe however that the limitations of age of the Model 3 and the small size of the sedan market will make it unprofitable to push sales.

All of this comes to a head in 2023. At that point the government quid-pro-quo for financing the plant and offering a tax holiday comes due. In particular, the company needs to begin paying Chinese taxes (Why China Could Be Tesla's Undoing).

To conclude, the strength of the Model Y will likely carry Tesla through CY2022. However, with no new product in the offing, 2022 will be as good as it gets.

This article was written by

Mike Smitka profile picture
309 Followers
I'm a retired academic economist. Over the decades I have focused on research on the auto industry and on the Japanese economy. But I was also a banker and worked in factories, and for the past 27 years have visited suppliers for business case and engineering presentations on innovations, as a judge for the Automotive News PACE awards. As such, I've visited about 50 suppliers, in Korea, Japan, the US, Canada and France. (I've visited another 50 or so via other activities.) I'm also on the steering committee of the GERPISA consortium of auto industry researchers, and was on the committee planning their annual global conference in Detroit, which was replaced by a virtual conference. I am active in the Industry Studies Association. I'm the co-author of Smitka and Warrian (2017), A Profile of the Global Auto Industry: Innovation and Dynamics, now available via Amazon as an inexpensive eBook.I first lived in Tokyo in 1975, after graduating from Harvard with a degree in East Asian Studies. My econ PhD is from Yale; the Nobel Laureate Oliver Williamson was my dissertation chair. I've spent 7 years in Japan, and have spent 2 months or more in China, Korea, Germany and the Philippines. I read, write and speak Japanese, and read German and Chinese.My current research interests are technology in the automotive supply chain, and the geography of the Chinese industry. My investing is passive, via my university's TIAA retirement plan.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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