Trade tensions impact automakers in more than one way. In addition to subduing the demand appetite in China’s auto market, trade tensions led to a weaker Chinese yuan. We’ll see how the trade tensions impact Tesla.
Trade tensions and automakers
A softer yuan is negative for foreign automakers operating in the country. Tesla (TSLA) is one of the casualties of the trade war. China weakened the yuan at the beginning to August to offset higher tariffs from the US. Tesla considered price hikes for its cars in China starting in September. On August 26, a Bloomberg report cited a Tesla sales representative. The report said that the company plans to hike its car prices in China this week.
Tesla’s higher car prices in China
On Thursday, Tesla finally announced the price hikes, as reported by Reuters. The price for Model X is 2.4% higher at 809,900 yuan. The price for the company’s Model 3 long-range dual-variant model rose 2.3% to 439,900 yuan.
Investors should note that the company imports all its cars to be sold in China. Due to the weaker yuan, operating profitably is a challenge for Tesla.
Will Tesla hike the prices more?
There’s still more room for Tesla to hike prices. China escalated the trade war by announcing retaliatory tariffs on $75 billion of US goods on August 23. China also announced the resumption of 25% tariffs on US automobiles and 55 auto part imports on December 15. Resuming the tariffs impacted US auto companies.
China’s auto slowdown and auto companies
Foreign auto companies are already battling slower sales in China. In China’s Car Sales Fall, Compounding Slowdown Fears, we discussed that China’s auto sales fell for 13 consecutive months until July. After seeing a decline in Chinese sales in 2018, Ford (F) and General Motors (GM) haven’t seen an improvement in 2019. In 2018, Ford’s China sales fell 14.3%, while General Motors’ sales fell 9.8% YoY (year-over-year). Tesla reported an increase of 42% in its China sales in the first half of 2019. The strength is mainly due to the launch of the company’s mass-market Model 3 in China in February.
China’s policy shift in NEVs
China’s domestic automakers are also reeling from trade war tensions, the demand slowdown, and policy shifts. NIO (NIO) has lost more than half of its market value this year. Several factors are responsible for the decline. The company recalled a large portion of its E8 models. Also, China stopped offering subsidies for NEVs (new energy vehicles) in July. Due to the policy change, China’s NEV sales fell for the first time in two years. The NEV sales fell 4.7% YoY in July. Read Can NIO Recover from Its Slump by Accelerating Deliveries? to learn more.
Will Tesla prices will come down?
While Tesla increased its prices in China, they will come down eventually. Investors might recall that Tesla is building a Gigafactory in Shanghai, China. Rolling out new cars from the factory will be cheaper for two reasons. First, Tesla will be able to avoid a large part of the duties that China levies on foreign-made cars. Second, the cost of production in China will likely be cheaper compared to building the same car in the US. In 2018, Tesla mentioned in a press release that it was “operating at a 55% to 60% cost disadvantage compared to the exact same car locally produced in China.”
We discussed how Tesla is on schedule to start its Model 3 production in China by the end of 2019. Read Could Tesla’s China Gigafactory Be Its Secret Weapon? to learn more.
So, while Tesla’s domestic prices for Chinese consumers would benefit from localized production, the company still won’t be completely immune to the trade war and tariffs. China announced tariffs of 5% on US auto parts starting on December 15. Even at Tesla’s China factory, the company will import most of the auto parts. The parts will attract an additional 5% duty if the Chinese tariffs go as planned.
Also, Tesla only plans to make basic Model 3 and Model Y cars in China. So, the prices of all the other variants will still be subjected to normal tariffs.
Price hikes impact consumer demand
Many experts discussed what the price hikes would mean for Tesla and Chinese consumers. According to Fortune, Robert W. Baird analyst Ben Kallo thinks that price hikes are positive. Baird said, “Companies don’t typically increase price if there are demand worries.”
Fortune also cited Jeff Osborne—an analyst at Cowen. He said that higher prices won’t stop many Chinese customers from buying Teslas. Osborne said, “There is always a core group of buyers that want goods and services immediately that are less price sensitive.”