Will Tesla Unveil a Made-in-China Model 3 Tomorrow?

US electric car giant Tesla (TSLA) is trying to improve its presence in China—the world’s largest auto market. In May, the company started taking preorders for a made-in-China version of its most affordable and popular sedan, the Model 3. This week, Tesla seems to be taking another step in this direction.

According to a recent message from reporter 主笔唐驳虎 on Weibo—China’s Twitter-like microblogging site—Tesla will unveil its made-in-China Model 3 on Thursday. The claim first appeared in an Electrek.co report. It suggests that Tesla “will show the first Shanghai brand Model 3” at “the opening ceremony of the Shanghai World Artificial Intelligence Conference” on August 29.

The claim seems to have more weight since Tesla CEO Elon Musk is already in China to launch the Chinese division of The Boring Company. Musk confirmed his trip to China in a tweet on August 3.

Tesla Model 3 ambitions in China

In June 2018, Elon Musk confirmed plans to build a Gigafactory in Shanghai during Tesla’s 2018 shareholder meeting. The company plans to build electric cars as well as battery pack modules at the Gigafactory. In January, TSLA sped up its plans to construct the factory when Musk broke ground at Shanghai.

The ongoing US-China trade war is one reason why Tesla had to accelerate its plan to start manufacturing in China. In October 2018, the company revealed that it has been facing headwinds due to tensions between the world’s two largest economies. At the time, Tesla said, “Those trade tensions have resulted in an import tariff rate of 40% on Tesla vehicles versus 15% for other imported cars in China.”

Trade war widely hurting US auto companies—not just the Model 3

Interestingly, Musk also seemed to complain in a tweet about China’s high auto tariffs to President Trump in March. Since then, US-China trade tensions have only escalated. Both countries increased tariffs on imported goods worth hundreds of billions of dollars. Earlier this week, the trade war took another ugly turn. President Trump accused China of stealing the United States’ “Intellectual Property at a rate of Hundreds of Billions of Dollars a year.”

In a series of tweets, Trump also went on to say, “Our great American companies are hereby ordered to immediately start looking for an alternative to China.” The tweet reflects a deteriorating US-China trade relationship. These tensions are taking a huge toll on US carmakers.

After peaking in 2016, US auto sales have trended negatively. With US car sales on a downward trajectory, it’s more important for US automakers to focus on key geographies outside their home markets and drive growth. However, the United States’ ongoing trade tensions with China have worsened the situation for US car companies including Tesla, General Motors (GM), and Ford (F).

Mainstream US automaker sales have declined significantly in the last year. In 2018, Ford reported a 14.3% fall in total sales in China. Meanwhile, GM sales tumbled 9.8% year-over-year. These companies are still hopeful about a turnaround. But Ford and GM haven’t seen any improvement in their Chinese sales this year.

In the most recent quarter, which ended in June, General Motors and Ford’s China sales fell 12.2% and 21.7% year-over-year, respectively. Plus, both GM and Ford continue to face fierce competition from local Chinese carmakers—including China’s state-owned car companies.

Tesla Model 3 competing with Chinese automakers

Chinese electric carmaker Nio (NIO) has also been trying to expand in China to better compete with Tesla. However, Nio faces challenges after a voluntary battery recall of 4,803 units of its ES8 sedan. The recall is taking a massive toll on Nio’s car deliveries, which fell 37.5% sequentially in July.

Nio, a five-year-old company, has delivered just 19,727 cars to customers. So the battery recall affected nearly 24.3% of Nio’s total units delivered since its inception.

If Musk unveils a made-in-China Tesla Model 3 this week, as the Weibo report claims, it would highlight Tesla’s continued focus on the Chinese market.

Tesla stock continues to suffer

Despite reporting far better-than-expected car deliveries in Q2, Tesla stock continues to trade on a negative note. TSLA is down 4.2% in Q3 so far. Meanwhile, it’s lost 11.4% in August.

Quarter-to-date, General Motors stock and Ford stock are down 2.5% and 2.2%, respectively. But Nio stock has surged 14.1% despite dismal July deliveries.

Tesla’s struggle for sustainable profits could be one reason why Tesla stock is trading on such a negative note. But the company’s consistent sales growth and aggressive Model 3 plans in China might warrant more appreciation from investors.