Tesla under pressure after huge production cut in Shanghai 📉

12:44 pm 9 December 2022

Reuters news agency reported that Tesla (TSLA.US) intends to completely suspend Model Y production in Shanghai between December 25 and January 1. Reuters cited an internal memo from the company, which was reviewed by two people familiar with the matter. The memo purportedly detailed Tesla's upcoming assembly plans.  According to Reuters sources, the suspension of production was not originally planned; Tesla has not yet responded to a request for comment:

  • Globally, Tesla planned to increase production of the Model Y and Model 3 in the last quarter of the year, as new factories in Austin, Texas, and Berlin would gradually ramp up production. Reuters reported on this in September, so the more recent reports negatively surprised investors;
  • Production of the latest version of the Model 3 was scheduled to begin in the third quarter of 2023 in Shanghai, and today the market is raising questions about whether Tesla will be able to meet its original production targets and whether the Model 3 will also be affected by the production cut. Reuters has still not been able to determine the reason for the planned reduction in car production in Shanghai, or why it will be shut down at the end of the year;
  • Bloomberg had already reported on Monday about Tesla's plans to cut production on Monday, according to initial reports that production was expected to drop by more than 20% from November. Tesla commented at the time that the news was false without providing additional explanations;
  • The suspension of assembly of new models at the end of the month would be part of a planned 30% production cut for Tesla's best-selling model to date. The Shanghai factory is the most important production center of Elon Musk's company. In the last week of December last year, the factory was maintaining full production capacity. The Model Y affected by the assembly suspension currently accounts for the largest portion of production at the Shanghai plant;
  • Tesla will produce 20,000 Model Y models in the last three weeks of the last month of the year. As recently as November, for example, the production rate was 13,000 models per week, which should result in 39,000 in December. It is still unclear how and if parallel Model 3 production will also be affected;

Higher inventories and weakening demand ?

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Tesla's warehouses in China are struggling with elevated inventory levels after the Shanghai factory completed an upgrade of its production facilities over the summer. Tesla's electric vehicle inventory in Shanghai, rose in October at the fastest pace in the factory's operating history. Since then, Tesla has decided to cut prices and launched a marketing campaign , aimed at higher sales of cars in the 'home' Chinese market. As a result, the company posted record sales in China in November. On Wednesday, it offered a time-limited discount of 6,000 yuan (about. $850) to buyers in China on certain models through the end of this year. In November, Tesla's deliveries to the Chinese market totaled 100,291 cars made in China. This gave a record sales since the Shanghai factory opened in 2020. The information was reported by China's Xinhua news agency on Monday, citing the company as a source.

While Beijing eased its zero-COVID policy this week, filling markets with optimism, the auto industry was hit harder than expected.  November passenger car sales in China fell for the first time in six months. Automakers estimate that car sales in China will remain at consistently lower levels next year. The market is beginning to price in a scenario where, at least in the short to medium term, Tesla's best months are behind it and it will struggle with rising inventories and an economic slowdown that, along with more expensive credit, could effectively curb demand for cars. As a result, the company's shares are already losing nearly 60% from their 2021 peaks. 

Tesla shares (TSLA.US), D1 interval. The company's shares have been under clear selling pressure since the beginning of the year and, despite record financial results, have failed to live up to Wall Street expectations. However, the declines stopped at the 61.8 Fibonacci elimination of the upward wave started at the bottom of the pandemic sell-off in 2020, giving hope for a rebound. The next potential support level appears to be the 71.6 Fibo abolition, which runs around $134 per share. The company's price-to-earnings ratio of 55 is nearly 250% higher than the average for companies in the S&P 500 index, making a potential earnings recession more painful for Tesla shareholders. The market still estimates that the company will report better financial results in 2023. Source: xStation5

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