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Tesla’s China Ramp-Up Not Expected before Mid-2020

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Tesla’s (TSLA) Gigafactory 3 in China is set to begin production in the next few months and ramp up to normal production levels in mid-2020. According to CNBC, JL Warren Capital has said that Gigafactory 3 will need some time to ramp up due to its semi-automated operations.

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Tesla’s Gigafactory 3 status

CNBC reports that JL Warren Capital wrote in a note, “Small scale testing is to start in Q4 with meaningful production increases not expected until Q1 and Q2 2020, with the goal of 2,000 units per week in June 2020. Unlike the fully automated process in California, GF3 will be semi-automated, as the local labor cost is still lower than full automation.”

However, work has progressed well on the site. Tesla’s Gigafactory 3’s assembly line is almost ready for activation.

Recent pictures of Tesla’s factory showed the Model 3 being assembled. The factory’s first phase has received “comprehensive acceptance” from authorities, and it is set to begin production soon.

Importance of Gigafactory 3

The beginning of production should be a big boost to the company’s growth plans. The company sells massive quantities of Model 3s in China, a vast market. Furthermore, local production could reduce Tesla’s cost per unit by saving on transport and production costs (due to cheaper labor), duties, and tax.

Additionally, the Chinese government’s recent tax breaks for electric vehicle manufacturers could help the company effectively price its product. Tesla’s locally produced Model 3s will be available to Chinese buyers at a lower price than its imported Model 3s, potentially boosting the vehicle’s demand in the region.

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The Model 3’s Chinese production and supply could overhaul Tesla’s product portfolio. Currently, the company mostly delivers Model 3s. In the second quarter, 77,634 of its total 95,356 deliveries were Model 3 deliveries. China comprises about 11% to its total sales of $6.35 billion in the quarter. This year, Tesla expects to deliver 360,000–400,000 vehicles, with a minimal contribution from Gigafactory 3. However, the higher supply of Chinese Model 3s next year could improve the company’s margin and place it closer to achieving profitability.

Tesla stock’s performance

Tesla stock has risen 7.9% this month, improving from last month’s decline. August wasn’t good for equity markets, as US-China trade tensions escalated and bond yield conversion pointed to the possibility of a recession. However, Gigafactory 3 minimized the impact of auto duties levied by China.

Tesla stock is trading 36% below its 52-week high of $379 and 38% above its 52-week low of $177. The stock has lost around 27% year-to-date, and 15% in the last year. The company has suffered losses as it tries to switch to profits. When Gigafactory 3 starts contributing to its earnings later this year, the company might start making profits.

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Peers’ performance and footing in China

This month, Tesla stock has outperformed peers, whose performance has been mixed. While Ford (F), General Motors (GM), and Fiat (FCAU) stocks have risen 0.9%, 2.9%, and 4.3%, respectively, Ferrari (RACE) stock has fallen 1.9%.

Ford is working hard to restructure its operations in China with its Ford China 2.0 blueprint. The company is revamping its Chinese operations to become profitable, and has planned launches there this year. The company incurred an operating loss in the region in the second quarter.

Similarly, Fiat’s Asia-Pacific deliveries fell 34% due to lower volumes from its China joint venture. Meanwhile, Ferrari’s Mainland China deliveries grew robustly. In the second quarter, Ferrari’s sales in Mainland China, Hong Kong, and Taiwan grew by 63% to 289 units. To learn more, read Automakers’ Growth Outlook: F, TSLA, GM, FCAU, and RACE.

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