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Why Tesla's second half of 2019 will be better than the first [Part 2]
Posted on September 08, 2019 by Shankar Narayanan
Tesla’s road to delivering 360,000+ cars in 2019 starts in the United States, runs through Europe and ends in China. In Part 1 of this analysis, we detailed Tesla’s production capacity and how many cars the company will be able to deliver in the United States this year. In this article, we'll take a closer look at what Tesla must do in Europe, China, and other major markets, along with the challenges that await the electric car maker.
Photo: Casey Murphy, EVANNEX
Europe: The Highway
For many years, Europe has been the second largest market for Tesla, and that’s not going to change in the near future. The introduction of Model 3 has only increased the importance of Europe for Tesla. If not for the multiple layers of tariffs and customs that inflate Tesla’s price in China, Tesla may well have built its first overseas Gigafactory in Europe.
Data from LMC Automotive shows that more than 20 million vehicles were sold in Western and Eastern Europe in 2018, which is seven million less than in China but three million more than the United States.
Source: LMC Automotive
For those who have been wondering why Tesla didn’t expand aggressively into other markets, the reason is very simple: North America, Europe, and China account for more than 70% of global light vehicle sales. But as you can see, Europe, when considered as a single market, is much larger than the United States; naturally, the entry-level luxury segment in which Model 3 competes will be larger as well.
In 2018, BMW sold 75,957 3-Series/4-Series in the United States. In Europe, BMW sold 106,991 3-Series and 52,248 4-Series. BMW Europe sold nearly twice the number of units it sold in the United States. The difference was equally wide for Mercedes-Benz, which sold 60,410 C-Class units in the United States compared to 150,995 units in Europe.
Simply put, Tesla could be planning to sell more Model 3s in Europe than in the United States. After all, Tesla has been able to sell every Model 3 it has built despite the company's fast and furious ramp. Why? Much can be attributed to the fact that Tesla's current production capacity remains far too small compared to current global volume. Europe has the potential to offset any demand shortfall the company might face in the United States - particularly if it decides to freeze Model 3 prices at the current level. It’s an unlikely prospect, though, as Tesla may try to lower prices as it hunts for more volume.
Tesla sales by quarter: Impact of Europe
As you can see from the table above, despite the drop in sales in the United States in June 2019 compared to December 2018, Tesla’s total sales for the month improved. Europe not only offset the drop but also added to it. If Tesla holds its current sales levels, the company will deliver nearly 46,000 units in Europe during the second half of 2019. Delivery of 100,000+ vehicles in Europe this year is not beyond Tesla’s reach.
China: The Toll Road
Tesla has been busy building Gigfactory 3 in Shanghai since October last year. According to the company, production may start by the end of this year. It will be extremely hard to project how many cars the company will be able to roll out from its Shanghai factory this year. Whatever happens will be a bonus, and the real effect of local production will only be felt in 2020.
According to InsideEVs, Tesla sold 21,830 Model S, X and 3 in China in the first half of 2019. Meanwhile, Tesla reported revenues of $1.469 billion in China in the first two quarters of 2019, a growth rate of 41.8% compared to last year. Even if Tesla manages to repeat its first half performance, the company will end up delivering more than 40,000 vehicles in China this year.
A conservative forecast
Based on these numbers, below is a conservative estimate at what Tesla's 2019 delivery forecast could look like for the top three markets:
- United States: 180,000 units
- Europe: 100,000 units
- China: 40,000 units
- Total: 320,000 units
As noted, these are extremely conservative estimates as Tesla has several levers to pull in order to increase demand. With production capacity already on track to build 330,000 cars annually and Europe providing enough demand, the challenge for Tesla will be to increase production and delivery rates further without squeezing the bottom line. If Tesla manages to do that, then hitting the lower end of its 2019 delivery guidance looks well within the company's reach.
Author Bio: Shankar Narayanan is the editor of 1redDrop.com. Has an MBA from Kent State University and an engineering degree from Madurai Kamaraj University. He has been an active contributor to top financial sites like SeekingAlpha and GuruFocus, and has a penchant for talking business, finance, and technology.