Tesla Stock Extends Decline on China Price Cuts

Tesla stock (NYSE: TSLA) is trading down in premarkets today and looks on track for its 11th decline in 12 trading sessions after the company lowered car prices in China. Reports of the company halting production in Berlin are not helping matters either.

Tesla has lowered prices for some of its Model 3 and Model Y variants in China. The Model 3 Rear Wheel Drive would cost $34,639 in China which is down 5.9% from the previous price. Tesla has also lowered the price of Model 3 All-Wheel Drive by 3.9%.

Tesla also cut prices for some Model Y variants but spared Model Y Performance from the price cuts. The company has also stopped giving the insurance subsidy for Model 3 vehicles.

Tesla cuts car prices in China

Tesla’s price cuts would only add fuel to the fire in the price war in the world’s biggest market for electric cars. Notably, Li Auto has also cut prices on some of its vehicles as the company looks to further scale up production after surpassing a monthly delivery run rate of 50,000 vehicles in December.

Notably, several analysts are getting apprehensive about Chinese EV stocks amid the price war. In its report earlier this month, Bernstein said, “We expect competition within the domestic market to remain intense and put pressure on pricing and profitability.”

It added, “Competitive landscape will be more challenging, and pricing pressure to ensue. Although EV demand is set to remain resilient, the industry will confront three major challenges on the supply side: overcapacity, new model launches and the rise of new tech entrants such as Huawei and Xiaomi, which point to growing competition.”

The price war is not limited to China alone and there is a price war in the US EV market also as Tesla has been on a price-cutting spree prompting other automakers to follow suit. These price cuts have led to a fall in Tesla’s operating margins which fell below 8% in Q3 2023.

The price war was taking a toll on the earnings of startup Chinese EV companies most of which are anyways posting losses. NIO’s gross margins fell to a mere 1% in Q2 and Xpeng Motors posted negative gross margins in Q2 as well as Q3.

Tesla lost the EV leader crown in Q4

Last year, BYD dislodged Tesla to become the world’s largest seller of new energy vehicles – which includes both battery electric cars and hybrids. The Chinese EV giant delivered over 3 million cars in 2023 which was in line with its guidance. Importantly, it delivered 525,409 electric cars in Q4 which was ahead of Tesla.

While Tesla is still the EV market leader in terms of full-year EV deliveries, BYD was the biggest global seller of EVs in Q4. The bulk of BYD’s sales however come from its home market of China even as it is trying to expand into new geographies.

Hertz cuts its EV fleet

Tesla meanwhile suffered another setback after Hertz announced yesterday that it is cutting its EV fleet by 20,000. In 2021, Hertz made the famous pivot to EVs and said that it would buy 100,000 Tesla vehicles. “Electric vehicles are now mainstream, and we’ve only just begun to see rising global demand and interest,” Hertz’s interim CEO Mark Fields said back then.

Markets gave a thumbs up to that announcement and while Hertz shares rose 10%, Tesla’s market cap surpassed $1 trillion for the first time. It became the world’s first automaker to achieve the feat and its market cap peaked at around $1.2 trillion in November 2021.

The EV industry has a demand problem

Meanwhile, Hertz continued to invest in EVs under Stephen Scherr who took over as the CEO in February 2022 and just a few weeks after he took over the company announced that it would buy 65,000 EVs from Polestar. In September of the same year, Hertz said that it would buy 175,000 EVs from General Motors over five years.

Things however have changed since then and far from being in short supply, there is an abundance of electric cars and automakers across the board are delaying their EV investments and multiple companies cut their 2023 production guidance due to weak demand.

In an interview, Scherr said, “Certain of these EVs became uneconomical for us.” He also blamed “unprecedented” price cuts by Tesla which led to a steep decline in the value of used cars.

He said that while “Tesla is among the best-selling cars in America” but added, “it’s not yet the best rental car.”  Scherr acknowledged, “Those two have not converged as quickly as many people, including ourselves, thought. But they will.”

Automakers are delaying EV investments

Amid the price war and the rising losses, many automakers have turned cautious on the ambitious EV plans. For instance, General Motors is scaling back investments and would not go forward with the proposed EV joint venture with Honda Motors to produce small electric cars.

Ford too is going slow on its EV investments amid lower-than-expected sales and rising losses. Ford expects its EV business to lose $4.5 billion in 2023 which is 50% higher than its previous forecast. The company also scaled back its EV production targets and said that it now expects to hit an annual EV production capacity of 600,000 EVs only by 2024 versus the previous guidance of 2023.

As for the 2 million EV production guidance by 2026, the automaker said, “we maintain flexibility on where we reach when we reach two million total EV global capacity because we are balancing growth, profitability, and returns.”

Tesla halts production in Berlin

Meanwhile, separately, Tesla is halting production in its Berlin plant due to the Red Sea crisis. In its statement, Tesla said, “The armed conflicts in the Red Sea and the associated shifts in transport routes between Europe and Asia via the Cape of Good Hope are also having an impact on production in Gruenheide.”

The company added, “The considerably longer transportation times are creating a gap in supply chains.” Notably, the plant relies on imports from Tesla’s China factory and has been hit by a shortage of key components.