Tesla vehicles are displayed in a showroom in Manhattan
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Electric vehicle pioneer Tesla began delivering made-in-China Model Y crossover vehicles on Monday. Local production for the company will impact everything from delivery volumes to profit margins.
The Chinese built Model Y was approved for sale late in 2020 and Tesla (ticker: TSLA) confirmed that production had begun when it released fourth quarter delivery figures in early January. Now customers are getting their cars.
Profit Margins
Local production, in China, or other geographic regions means lower delivery costs. And lower costs help Tesla make more money. That was the scenario that unfolded in 2020 with the Model 3 sedan as Tesla’s Shanghai facility ramped up production. “The cost of vehicles produced in Shanghai in Q1 is already lower than the cost to produce the Model 3 in Fremont,” reflected CFO Zachary Kirkhorn on the company’s first quarter 2020 conference call.
Tesla earned about 23 cents a share during that quarter, far surpassing Wall Street projections for a per-share loss of about 7 cents. That profit was reported during the depths of the Covid-19 pandemic, around the time Tesla’s Fremont, Calif. facility was closed due to stay-at-home orders.
Pricing
Lower costs have also allowed Tesla to cut prices several times in 2020. CEO Elon Musk is prioritizing volume growth over profit margin for now. He wants Tesla to get as big as it can and produce lower priced cars for different segments of the car market. “I think we will not succeed in our mission if we do not make cars affordable,” said Musk on the company’s second quarter 2020 earnings conference call. “Yes, we need to not go bankrupt, obviously, that’s important…But we’re not trying to be super profitable either.”
Tesla is selling the Model Y manufactured in Shanghai for a base price of 339,000 Yuan or about $52,000. The NIO (NIO) EC6 crossover vehicles start at 368,000 Yuan.
Production
Tesla will have more cars made in China in 2021 than it did in 2020 as it ramps up production of the Model Y. The company’s Texas facility as well as its Berlin, Germany facility should come on line as well.
More capacity is important for investors. Tesla delivered about 500,000 cars in 2020. Wall Street expects that to rise to about 840,000 cars in 2021. Delivery estimates for 2021 have been rising in recent weeks. The consensus 2021 delivery estimate ended 2020 at close to 800,000 vehicles.
The Stock
Investors will likely get some guidance regarding 2021 deliveries when Tesla reports fourth quarter earnings on Jan. 27. Delivery guidance will be a key number to watch for the stock.
Shares are still performing very well. After rising more than 740% in 2020, Tesla stock is up another 17% year to date. The S&P 500 and Dow Jones Industrial Average, for comparison, are both up less than 1%.
Wall Street expects the company to report per-share earnings of about $1. That would be a quarterly record for the company.
Write to Al Root at [email protected]
