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Sorting Out What Lies Ahead for Tesla (Part 5, the Good, Bad and Ugly in Recent News)

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Read part 1 here, read part 2 here, read part 3 here, read part 4 here

Shares in Tesla (TSLA - Free Report) traded down $3.39 today or 1.2% on a pair of news items with very different potential consequences for the company. Good news about deregulation in the Chinese market probably kept the shares from falling even more after Tesla announced that they were suspending the production of the Model 3 for “four or five days.”

China, Tariffs and Joint Ventures (Good News)

For the past 17 years, China has imposed onerous restrictions on foreign automakers who want to sell cars into what has become the world’s biggest market.  Intended to protect fledgling domestic manufacturers from competition from the likes of General Motors (GM), China imposes stiff import tariffs on autos from other countries (currently 25%.)  

If a non-Chinese company seeks to avoid the tariffs by shifting manufacturing inside Chinese borders, they are prohibited from owning more than 50% of the company.  They are forced to enter into a joint venture with a Chinese firm at no better than even terms.   Because of the vast number of potential customers available, many automakers chose to do just that, and by all accounts are pleased with the results.  General Motors and Volkswagen (VLKAY - Free Report) , have both indicated their desire to continue the partnerships with their Chinese counterparts even when the restrictions are lifted.

680,000 all electric cars were sold in China last year, compared with less than 200,000 in the U.S.
China’s plan is to lift the joint-venture restriction this year for all-electric vehicles, in 2020 for trucks and in 2022 for all passenger cars.  China also has an aggressive philosophy on the adoption of electric vehicles to curb pollution by incentivizing EVs with tax breaks, installing vast networks of charging stations, and possibly even banning internal combustion vehicles in 2035.  

It’s a perfect environment for Tesla, but given the fact that they’re currently having difficulty producing enough cars here at their Freemont California factory to satisfy demand in the domestic market, one would have to believe that a fully functional Chinese Tesla factory is still a long way off.

Which brings us to the bad news…

Tesla reported late Monday that Model 3 production would be halted for the rest of the week to clean up production bottlenecks which are keeping them from ramping up production to the desired 5,000 cars a week.  They just recently broke the 2,000 vehicles/week threshold and this promises to set them back by at least that many.  Having taken 400,000+ deposits for the Model 3, Tesla is finding that potential customers and the capital markets are growing impatient with their apparent lack of progress.

Analysts differ on the seriousness of the shutdown, but most industry observers feel that at the very least, it’s highly unorthodox for an automaker to suspend production after already having made thousands of cars. However, CEO Elon Musk has never done anything exactly the way others do.

If they are successful at taking care of the supply and manufacturing issues keeping them from getting to 5,000 cars/week, the shutdown will have been stroke of genius and quickly forgotten.  If it ends up being just another missed opportunity and they stay at 2,000, the market will likely punish Tesla’s stock.

The Ugly

Personally, I’ve been riding in a Model X 100D as part of the Tesloop ride sharing service in Southern California. If you’re not familiar with Tesloop, think long-distance-Uber, driving between Los Angeles, San Diego, Orange County and Palm Springs. It’s a privately-owned company that buys only Teslas for it’s fleet.  On my most recent ride, the driver explained to me the SUV we were riding in had 280,000 miles on it and that it had never had any repairs other than replacement tires and brakes.  It was smooth, fast and comfortable and I found myself marveling at how well made it is.  But then again, with a price of $96,000 before options, it had better be well made!

If they can truly mass-produce a $35,000 (or even a $50,000) car with the same sort of quality, they’ll be an industry giant.  But that's a very big if.

I’ve been on the waiting list for a Model 3 for over two years and let’s just say I’m not holding my breath.

If you’ve read the whole series, you can probably tell by now that I’m cautiously bullish on Tesla.  But with a caveat – I’m bullish on the company, but not necessarily bullish on the stock as an investment.  It’s a great story and I want to see them succeed, but as a Strategist, it’s irresponsible for me to recommend having anything more than the most speculative portion of your portfolio in this stock.  

Sure, there’s some chance Tesla will someday be selling 10M cars a year worldwide like General Motors, Volkswagen and Toyota (TM - Free Report) , but there’s too much uncertainty in their near-term future to bet very much on it.


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