Tesla: Portfolio Expanded In China, Potentially Unauthentic Data Released To Association

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Its mission to sell only electric vehicles and usher in an era of change has created an aura around electric-vehicle and renewable energy storage products manufacturer Tesla Inc (NASDAQ:TSLA). Tesla's primary market, for the time being, is the electric vehicle market. This market is growing throughout the globe, funded by governments who are choosing climate-friendly economic policies. The greatest example of Tesla's future potential is Asia - which is all set to boom in the medium-term future.

In the short term, Tesla has a roller-coaster of a future ahead of it. With production suspended inside the United States and the Berlin-Brandenburg Gigafactory slated to meet demand in Europe in the future when stricter vehicle emission guidelines come into play, the company has limited cards to play if it's to have any hope of even reaching a self-set vehicle delivery target of 500,000 cars this year.

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Tesla's main focus amidst the coronavirus needs to be China, as we've highlighted multiple times before. The Model 3 led China in vehicle registration in February, at a time when the overall market shrunk by more than two-thirds, providing the company with a much-needed respite from a terrible February it witnessed in Europe. Overall, in Q1, Tesla still set the record for the highest deliveries in the first three months of a year, as it likely braces for impact during Q2 and Q3.

On that note, taking stock of things over the course of the last week, the electric vehicle manufacturer seems to recognize China's importance, visible through key official developments and information sourced through social media.

Tesla chief executive officer Mr. Elon Musk poses with Model 3 buyers in China. Getty Images

Tesla Expands Model 3 in China Through Cheap Local Variants & Is Yet to Submit Data To Local Automobile Manufacturers Association

Mirroring the country's recovery, Tesla has also started to resume operations in China as fallout from the coronavirus starts to ease. The company resumed production in February and has gone even as far as to re-open its showroom in the Chinese city of Wuhan, believed to be the first epicenter of the virus' outbreak.

Yesterday's report by Reuters that used from Tesla's website in China, confirms that the company is expanding its options in China in this critical time. The report states that Tesla has expanded the Model 3 lineup by commencing sales of two new variants. These, like other Chinese Model 3s will be built inside the country and therefore let Tesla avoid import duties and taxes.

The shift lets Tesla sell locally manufactured long-range (600 km+) rear-wheel variants of the Model 3 to Chinese customers roughly 100,000 yuan cheaper than the imported all-wheel variant of the vehicle that Tesla had previously imported.

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In addition to variants mentioned in Reuters' report, Tesla has also introduced a standard locally manufactured Model 3 variant in China with a 299,050 yuan price. It's this model that the company might hope will help it rake in more market share in China, despite providing lower margins and make up for these through larger volumes shipped in the future.

Analyst estimates made before February had slated China's electric vehicle market to stand at 650,000 at the end of this year. Even if COVID-19 shrinks this estimate by half, Tesla would have to more than double its projected output from the Shanghai factory if it wants to meet all this demand, as 325,000 vehicles delivered lie at the bottom-end for the number of vehicles that the company should be able to deliver globally by the end of this year. Tesla, for its part, has not provided an update to its delivery estimate of 500,000 - but as Fremont runs cold, the chances of it meeting this goal are difficult (read: roller coaster ride above).

Tesla's Gigafactory 3 in Shanghai, China/Tesla

Reports that Tesla is yet to submit statistics to China Association of Automotive Manufacturers mar optimism following CPCA wholesaler delivery figures

Speaking about China, it's now being reported that Tesla has not submitted statistics for March to the Chinese Association of Automotive Manufacturers. The CAAM was established in 1987 and is a non-governmental body that can not legally require its members to submit data. The company's vehicle shipments to wholesalers opened eyes a few days back when China's Passenger Car Association stated that the company had delivered 10,160 vehicles - a figure that grew by 156% month-over-month and accounted for roughly 20% of total shipments made in China in March.

The reasons behind this inability to report remain unclear and our belief is that even if Tesla does not report them, any inventory mismanagement or over/under-reporting is bound to come out sooner than later. The 10,160 vehicles shipped in March leave open the question of how many of these cars have actually made it in customers' garages - but given that the total deliveries to wholesalers in China grew by 262% in March, Tesla is far from the only company operating in China optimistic about the country's potential.

The full translated text of Cls.cn's report about Tesla's inability to report data to the CAAM is as follows:

Chen Shihua, deputy secretary general of the China Automobile Association, responding to the question "Why is Tesla no in the automobile data of the China Automobile Association?" said that according to the requirements of Chinese statistical regulations, any OEMs produced by the plant should report relevant data to the China Automobile Association. The China Automobile Association is currently unable to verify the authenticity of the data released by Tesla. Currently, the China Automobile Association is communicating with Tesla and it hopes that Tesla will report relevant data to the China Automobile Association as soon as possible. According to data released recently by China Federation of Trade Unions, in March, Tesla sold 10,160 vehicles in the Chinese market, setting the company's highest monthly sales record in the Chinese market.

Based on what we can gather from this light translation, it's looking as if there's a conflict between Tesla and the CAAM about the nature of the data reported to the body. (Investors are advised to conduct their own due diligence before making decisions based on the statements above and below)

Sample of used Tesla cars shipped to Caravana at the end of the third quarter of 2019 with inflated values. @Covfefe Capital/Twitter

Used vehicles shipped to Caravana continue to show inflated prices

Since the bulk of this post is on Tesla's deliveries, a mention of an interesting discrepancy in the prices of Tesla vehicles shipped to used car retailer Carvana without a change in title is necessary. As per data compiled by Mark Johnston (shown above), the resale values of vehicles shipped to Caravana is significantly higher than the amount Tesla had listed as the price in its records. The title of the vehicles also remains unchanged after the transfer, further muddling matters.

It's likely that most of these vehicles represent recalled leases and other arrangements part of Tesla's Resale Value Guarantee (RVG) program. It's also entirely possible that the value inflation helps Tesla manage RVG allocation internally. Tesla's recent change in its price matching policy for trade-ins might also reflect this reality, as the company might have been forced by clever individuals to pay more for its traded-in cars than they are worth in reality.

Donning our tinfoil hat, and quoting Tesla's statements regarding a fresh Securities and Exchange Commission investigation below might add a bit of context into recent affairs. As per the company's 10K filing (page 120):

On December 4, 2019, the SEC (i) closed the investigation into the projections and other public statements regarding Model 3 production rates and (ii) issued a subpoena seeking information concerning certain financial data and contracts including Tesla’s regular financing arrangements.

Staying on context, read Tesla's second note to financial statements titled Summary of Significant Accounting Policies on page 70:

Use of Estimates

... Estimates are used for, but not limited to ... ....significant economic incentive for residual value guarantee arrangements, ........residual value of operating lease vehicles, ......... Management bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates.

Whether there is more to this discrepancy than meets the eye, only time will tell. Tesla, for its part, needs to focus on China to ensure that its cash position remains healthy throughout the year. For our part, we'll reach out to Tesla to learn more about these affairs.

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