On Oct. 9th, Tesla organized a county fair event that it called “Giga Fest,” inviting visitors to its newest factory set to start production of its cars in the industrial heart of Europe: Germany. The company hopes to start production in November after German government approval. With this move, the company looks set to capitalize on the popularity for electric vehicles in the Continent.
A total of 1.42 million battery-electric vehicles (BEVs) and plug-in hybrid vehicles (PHEVs) were sold in Europe in 2020, representing a 147% year-on-year increase. Europe has been an excellent market for both BEVs and PHEVs on account of a regulatory push on manufacturers to increase sales of low-emission cars in order to avoid EU emissions fines as well as generous subsidies offered by virtually every European country. In the first half of 2021, this trend has continued with a 157% increase in EV sales estimated in comparison with the same period in 2020.
Tesla’s U.S.-made Model 3s have been assembled in Vossburg, Netherlands, since 2013. In terms of top European countries for Tesla vehicles, Norway, the Netherlands, and Germany had remained a steady fixture in the top three of 10 in both 2018 and 2019.
While Tesla sales went off to a roaring start in 2020 followed by a bumpy path for the rest of the year, 2021 has been estimated to have had a lot more upticks than downturns in estimated sales figures so far.
According to news reports, Tesla has had particularly high sales in Norway (which has been leading the path in EV adoption in Europe) this year. Of the 128,856 cars sold in the year till September in the country, Tesla accounted for 11% of the market share (a little over 14,000). For comparison, in September:
The Market Problem
The aforementioned numbers exemplify the battle for Europe: the company faces stiff competition from indigenous manufacturers Renault-Nissan-Mitsubishi Alliance and the Volkswagen Group. Volkswagen’s e-car plant in Zwickau went online in August 2020 and is expected to manufacture up to 330,000 vehicles per year covering six e-models from three Group brands at peak volumes. Renault operates facilities in northern France – geared to increase production to 400,000 vehicles per year – while both Nissan and Mitsubishi are reliant on Renault for production. Nissan has started focusing on EV battery systems for the alliance in its new plant in Britain.
Together, these two companies commanded nearly 45% of all EV sales in Europe in 2020 (relative to Tesla’s 20%). So, in terms of competition, Tesla is not going to have a cakewalk over its rivals in Europe.
As of the end of August, it was estimated that Tesla’s high-end Model S and Model X have lost favor in Europe. This was confirmed, in a rather roundabout fashion, by the company in its Q3 earnings release where it stated that “the Model S and Model X mix reduced YoY” in favor of “lower ASP (average selling price) vehicles.” The company’s China-made Model Y, on the other hand, has been gaining ground since its introduction to the Continent in the middle of Q3 2021. VW Group’s total sales volumes of its brand-new BEV models have swamped those of Tesla this year. Tesla also faces ferocious competition from the Hyundai-Kia Group.
In estimates for Europe’s Top 20 BEV new car registrations by model for this year, the company’s rivals have carved out vast swathes in this space.
The Plant Problem
Near the end of 2020, Tesla announced plans to move production from California to Texas. For the Model 3 production line in California, Tesla had spent almost $4 billion for a production capacity of 250,000 Model 3s a year.
When Tesla built the Model 3 factory in Shanghai (China), it was reported that the setup cost for the company was less than half this amount. This suggests that capex in California is an expensive affair. On the other hand, leaked internal documents showcase the estimated cost of the Texas plant to be only $400 million.
This leads to one of two possible concerns for the company:
On October 12, the company announced that it will boost output from its California plant (as well as its Nevada battery plant) by 50%. As deduced earlier, capex in California is an expensive affair and this expansion could come with significant costs in upcoming quarters. In the company’s Q3 update, it was confirmed that the Texas plant would manufacture Model Ys, followed by the Cybertruck, with an expansion of capacity in coming years.
The intentions stated with regard to Giga Berlin are rather enigmatic. The Q3 update indicates that the plant will build Model Ys and some reports expect them to be Europe-specific Model Y variants, with parts being megacast to reduce the number of parts and an updated battery pack. Interestingly, the company admits to buyer preferences shifting towards the lower end of the price segment, but is working on building up capacity in vehicles for the mid-price market segment.
Furthermore, VW has entered the fray in Tesla’s heartland by initiating production of the ID.4 BEV in its Tennessee plant, with further plans to expand EV manufacturing in China as well. A continued shortfall in meeting demand would no longer mean customers would wait patiently in line: there is a growing list of increasingly attractive alternatives available at all price points. Hence, more details on the flexibility of manufacturing in the new plants would be rather welcome.
Tesla’s long-delayed 4860 battery pack – which would effectively make the company’s cars lighter and give them longer range – continues to evade a concrete completion date. The battery packs are considered “necessary” for the success of Tesla’s envisioned Cybertruck, Roadster and Semi models. During the company’s annual meeting earlier this month, Musk said that Cybertruck would reach volume production in 2023, which seems to imply that the new battery pack won’t be ready until then.
If the strong sales trend seen by the company in Europe in the YTD is any indicator of public faith, the company’s brand equity within the Continent is in good shape. It is no great leap to state that establishing a production line in Europe might help bolster sales further.
However, the company’s path is fraught with red flags: increasing competition that can lap up market share, low sales volume of Model Ys causing a lag in recouping plant expenses, delays in establishing a fast-charging network in Europe, R&D bottlenecks seizing up new product development, Bitcoin holdings going south, and increased levies on the higher-end models amid governmental push to encourage lower-priced EV proliferation are just some of them.
These “red flags” will likely create bumps on the stock’s trajectory, which will make tactical plays a very viable play in either the long or short. Investors with an eye for trends and the discipline for making quick decisions will likely find several profit-making opportunities in either direction – i.e. the “long” and the “short” – in the days to come.
Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Julian joined Leverage Shares in 2018 as part of the company’s primary expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined Leverage Shares from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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