With factories opening up in China and Europe, as well as a sixth automobile model released earlier this month, is Tesla’s new long-term plan a game-changer?
Whether you are a die-hard, bullish Tesla (NASDAQ: TSLA) superfan or a crusading anti-Musk skeptic, there’s one thing we can all agree on: the electric-car manufacturer and its eccentric CEO are never boring.
Back in October, the company reported that it had returned to profitability — albeit marginally — and also announced that it had made record quarterly deliveries with 97,000. In a year that has seen Tesla’s stock drop roughly 5% year-to-date through October, this is a good sign.
With this in mind, could the building of two new Gigafactories (Tesla production plants) in Germany and Shanghai be signs that Tesla is about to take the next step in its business life-cycle? Let’s take a look at the implications.
Tesla’s International Expansion
Constructed in just 168 days, Tesla’s new Shanghai Gigafactory, which began trial production last month, is expected to crank out roughly 150,000 models per year. Investors will be happy to hear this, considering the company has a long history of failing to reach production targets.
Not only this, but Elon Musk has also stated that the company is still on track to sell 360,000 Tesla models by the end of the year, which would see his company grind out a record-smashing 105,000 cars in the final 3 months of 2019.
Enabling production to be met is but one benefit from the new Shanghai plant! China is also the largest automobile market on the planet, despite growing fears of a slow-down in the industry. Until this year, China required foreign carmakers to link up with domestic ones to manufacture in the country, making Tesla the first company to take advantage of this, while also avoiding a 25% import duty.
On top of this, China announced back in August that it would exempt Tesla Model 3, Model S and Model X cars from its proposed auto tariffs, which will resume in December if a trade deal is not met between the U.S. and China. Though this would not be necessary anyway with production now in Shanghai, it does highlight the Chinese government’s willingness to work with Tesla, and even help.
With Tesla sales in China up more than 175% on last year, it looks as if Musk is in a good position to shore up the company’s status in the much-sought-after market of China.
Tesla’s decision to build in Germany, on the other hand, has been met with a lot more skepticism. Much of this doubt lies in the historical growth of the European auto-market, of which Germany itself is at the center with large brands such as Volkswagen (ETR: VOW3), Audi (ETR: NSU), and Porsche (ETR: PAH3). Even American rivals Ford (NYSE: F) have a large European presence, which has been struggling as of late.
The European auto market is large and mature and it probably doesn’t have much growth to look forward to. The electrifying of cars doesn’t represent a wild-card solution to this problem, but it does not change the fact that there are still too many auto-manufacturers in Europe: Europe could abandon internal-combustion completely and still have 20% of its car factories operating below full levels.
Rather than simply buying an existing factory in Europe, Musk has opted to build a brand new one in an already saturated market; an act that will take Tesla’s competitors on directly and cost the company $4 billion. Of course, buying an existing plant is still a possibility, but with Tesla’s history of ‘newer and shinier’ trumping ‘the cheaper option’, it is unlikely.
The jury is still out on the purpose of Tesla’s European venture, but Gigafactories are not strictly for car manufacturing, so perhaps it will be used for some more SpaceX ventures, or maybe even Neuralink?
Game-changer or Gambit?
The dangers of expansion into foreign markets are clear-cut enough, while most game-changers in the history of corporate growth have been gambits. Although China is emerging as a huge electric-vehicle market, and a Gigafactory in Shanghai makes more apparent sense than Europe, it is not without its own risks.
Foreign companies — especially U.S. based — rarely fare well in China. Facebook, eBay, and many more have tried and failed down the years. Much of this is down to misunderstanding the culture of the market, the government, and which local partners to use. If Tesla can learn from the mistakes of companies past, it might stand a chance.
Likewise, in Europe, Tesla’s new factory may seem like a move without much benefit, yet when looking at recent sales, the company has been leading the European plug-in vehicle market. The Tesla Model 3 recorded an all-time high 17,490 sales in September in Europe, beating rivals Nissan and Renault in EV sales. Between January and September, Tesla’s Model 3 led plug-in sales in Europe at 64,043.
Things are not so clear-cut as they might seem, and though it is early days, by expanding production worldwide, Tesla may be setting itself up to become the number one name in electric car sales across the globe.
Never short of ideas — as seen in Novembers wacky Cybertruck launch — Tesla and its never-dull CEO Elon Musk will be sure to entertain us for years to come.
MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in Tesla. Read our full disclosure policy here.