2021: Estimating Tesla Sales In China
Long Only, Value, Contrarian, Long-Term Horizon
Seeking Alpha Analyst Since 2017
Retired; computer programmer specializing in expert systems. Background in banking. Contrarian, long investor, but getting older rapidly. Fundamentally so skeptical that I don't even trust myself, so I rely on external measurements.
- Tesla's Chinese sales will increase in 2021, but not as much as many expect.
- China's EV market is not "white-hot", at least at the upper end.
- Using methodology which has been pretty accurate before, I try to project reasonable ranges for Tesla's potential sales in China in 2021.
- The final estimate implies that Tesla will not be able to reach 800K sales in 2021, nor get very close to that level.
Any reasonable reader should be asking "Why should I waste my time with this?" For all the skeptical sapients who may find this:
For the past two years, early in the year I have attempted to guess potential sales for Tesla's Model 3. In 2018, my guess was 35K, tops, and I was savaged for being too pessimistic by many. Actual sales were just under 30K. Last year (early), I thought about 80-85K domestic sales from the Shanghai factory of the SR+, and then later in the spring as Tesla cut pricing and said that it would add the RWD, I moved up to a maximum of 115K. There were consequent price cuts. Most expected well over 150K sales in China (of just the SR), but that was never in the cards.
Tesla did expand its offerings from Shanghai to include the Model 3 LR RWD, and then late in the year, Tesla shifted to the LFP Model 3 and was able to cut pricing again (about 250K CNY end price). Final sales for domestic Shanghai production were approximately 139K. Here is how it breaks out month by month:
Some of these numbers are a bit too high, but for this purpose, they are quite good. And indeed, we can see that even with the early high price cuts, there simply was not a huge market for the SR Model 3s. There is no doubt that the LFP pricing did give Tesla a boost at the end. There is also no doubt that the LR RWD version was urgently needed to boost sales numbers. By the second half (with already sharply reduced pricing), Tesla's average monthly sales of the MIC SR had already fallen well below 10K - implying that pent-up demand had been exhausted, and that the natural rate of demand was below 10K a month.
There were also two special factors in 2020 that very materially assisted Tesla's sales in China. Those were the special grant of an extra 20K NEV license plates in Beijing, and Shanghai's announced policy (to take effect in May of 2021) that prevents holders of non-Shanghai-issued plates from driving in much of the city, combined with a temporary unlimited NEV license plate allocation. The Shanghai unlimited-plate policy is now due to end this February.
Tesla's Chinese sales will increase in 2021, but not as much as many expect.
For example, I read articles such as this one:
Tesla is expected to make "around or over half a million" vehicles in China this year, with around 20% earmarked for international exports, industry sources with knowledge of Tesla's orders to suppliers said.
Very authoritative - apparently factually based given supplier orders, appearing on nasdaq.com - who could ask for anything more? 400K sales in China for Tesla (500K - 100K exports). Done deal. And yes, if Tesla could sell 400K cars in China this year, 800K global sales would be well within reach.
The only problem is that it is apparently impossible. The suppliers may have been given these order numbers, but many suppliers are sourcing components which are used both for production at Shanghai and for foreign production.
There is a very severe degree of misunderstanding about the upper-level Chinese market for NEVs as a whole, due to the following factors:
- The income/market split between the Tier 1/Tier 2 cities and the rest continues as strong as ever. See, for example, this article.
- Because incomes are higher in the Tier 1/Tier 2 cities, they were the first to launch on the great Chinese car-buying spree, and traffic congestion became a factor first there.
- The response was to impose strict limitations in these cities on the number of new license plates issued, and although NEVs may be preferred, the overall number of new licenses issued is highly restrictive. For example, in Beijing it is 60,000 new NEV licenses a year.
- Thus, most of the potential new buyers for Tesla cars simply are not allowed to drive them where they live and work, so they don't buy them.
The theory underlying projections of strong demand for Tesla cars in China really relied on buyers of European lux-tier gasoline cars who already had licenses switching to Tesla cars, aka California. It is not happening:
Chinese consumers who have licenses for ICE vehicles in license-restriction cities don't want to lose the license. They don't switch to NEVs, on the whole. Pricing means relatively little. Prestige may mean a lot.
China's EV market is not "white-hot", at least in the top half.
China did see a boost in NEV sales in 2020 compared to 2019, but more than all of the increase in EV sales occurred in the cheap "city" cars, such as the now-legendary SGMW Wuling HongGuang Mini. In half a year, it racked up nearly as many sales as the Tesla Model 3 did in the whole year. Of course, when you retail below 30K CNY versus 250-350K CNY, one opens up a whole new universe of buyers. By the end of the year, SGMW had become the top EV seller in China.
China's mid- and upper-end EV sales can only have declined:
Low-end "city" models were well over 200K. The mid and upper tier model sales must have declined YoY. CAAM estimates that most of the passenger vehicle sale increases in 2021 projected will come from the same source. A special program was launched in the second half of 2020 to promote sales of low-end EVs in the "rural" areas, and it should account for more than half of the 2021 projected increase.
Estimating reasonable ranges for Tesla's potential sales in China in 2021
This is not really very difficult. The two basic approaches to use are current market share for passenger EVs X next year's expected EV total, and/or this year's sales plus an estimate of the total add from the addition of the Y to Tesla's MIC Chinese offerings.
We have a breakout of last year's sales via DKurac:
Tesla ended with 147.5K sales out of 908K EV sales, for market share of 16.2%. But Tesla's market share began high and dropped throughout the year - Tesla's ending share was about 14.8% of all EV retail shares (given the estimate of 25.5K total sales in December). At one point earlier in the year Tesla had over 17%. It's also worth noting that Tesla had the lowest prices and widest range of offerings available in December.
Using the average 16% of estimated 1.3 million passenger EVs for 2021 gives us 208K, which is certainly meaningfully less than 400K. Using Tesla's high share of last year (18%), we get 234K. At 15% we get 195K.
So market share method gives us an estimate of 195K to 235K. Note that this method ignores the expected shift to a higher percentage of very low-end EVs in the total passenger EV market, so these are ALL high/positive estimates.
It should be noted that the competition will be fierce next year, and I would not necessarily assume that Tesla will grow its market share purely because of the addition of the Model Y. The Model Y is pricier than the Model 3, and the competition in the SUV/CUV EV realm will be very stiff.
For example, Hongqi (it appeared earlier in the luxury car table) is introducing its own e-SUV, and VW, which is a massive player in China (sold over 2.8 million vehicles in China last year) enters the affray with its Chinese ID.4 variants. Two of them, one for each JV. Both of these two companies have genuine advantages over Tesla with a larger existing customer base, and a better sales/distribution base. The Hongqi offerings are true lux, and have very competitive or better stats in comparison to Tesla's Y. Pricing on at least one of the MIC ID.4 versions is reputed to run between 210K and 249K, so cheaper than Tesla's offering. Tesla is not going to get a free pass in this space.
If one were to adjust down for either of these factors (increase in the share of low-end models or decrease in share from increased competition, especially in the SUV space), the low end estimate would lie more in the 175-185K region.
I am not going to go that low, although it would be reasonable to do so. I assume that Tesla will pull out ALL the stops, even if it must sell some cars at a net loss in China to prevent ending with that poor a result.
I do have some evidence for this belief. The gentleman running the Shanghai show is a very strategic thinker, and he launched a strategy in 2020 of pushing sales efforts out into the provinces. This was very aggressive, and it shows an intent to strongly compete. Many of the 150 stores cannot possibly generate a profit, but they are there to win space so that someday Tesla will be able to generate a profit. Tesla is also aggressively building SuperChargers in China, and they are not just concentrated in high sales regions. So I think I am safe in saying that Tesla will do almost anything possible to reach the high end of their possible sales.
Note that I was not sure of Tesla's ending strategy in China for much of last year. The alternate to the strategy that Tesla has apparently chosen would have been to go more aggressively after the top lux market, and when we found in May that Tesla was already trying to shift the performance 3s to the Shanghai factory, I suspected that was the route they were taking. It would have matched earlier statements from Tesla more closely.
For a top estimate with the market share method, we can pull out the stops and go to 20%, which would yield 260K sales. I don't believe that is possible, even if policies in a few of the Tier 1/2 cities are loosened to spur sales next year. I would say the absolute high end bracket would be 250K sales, and that does involve some optimistic assumptions.
The second method is even simpler. One looks at total sales of EV SUVs, and figures a possible addition, and then subtracts for the customer shift (some customers who would have bought high-end Model 3s will shift to the Y).
Total EV SUV sales have been pretty slim, as a look at the top-selling versions shows.
Tesla's Model Y isn't really an SUV. It's more of a CUV. But we will use the SUV numbers to assess the potential. Excluding the Model X (which may be negatively impacted by the Model Y), we have the top sellers totaling 106K last year.
For another look at the whole market, this information was just released:
So total EV SUVs were 218K, and those sales fell YoY. The drop is not surprising, given the relative shift to the "city" value EVs. Looking at these two tables, and assuming that Tesla gets an awesome amount of the SUV share, I cannot possibly convince myself that an estimate of more than 120K is even remotely reasonable. To get there I need electroshock therapy.
Assuming that Tesla gains 120K sales with the Y, and loses only 25K sales from the 3 by cannibalization, I have 125K + 120K = 245K vehicles. Essentially the same as my previous top estimate.
So in the end, I have 210K to 250K sales, or an increase running from 60K to 100K. With optimistic assumptions. This leaves Tesla running at about 50% capacity, so one must expect that they will try to export 50-100K vehicles.
The final estimate implies that Tesla will not be able to reach 800K sales in 2021, nor get very close to that level.
Because if they are not in China, where are they? If Europe increases by 50%, that's only an addition of 50K vehicles. If Europe increases by 75% (and Europe is the real hot market for EVs), then it's an addition of 75K vehicles.
These are my best, somewhat optimistic assumptions with respect to Tesla's 2021 sales, and they still leave me with Tesla running at about 50% of year-end capacity. That is going to hurt profitability.
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