The race is on for overseas automakers trying to rule China, and Wall Street is excitedly watching to see which company will be “the winner that takes most” there. When it comes to Tesla in China, the debate looms large, with bears expressing concerns about weakening policy support. Meanwhile bulls say that Tesla has what it takes to rule the EV market in China at the very least.
Both Piper Jaffray and Nomura have published reports on Tesla in China this week already—and it’s only Tuesday. Tesla stock popped on Tuesday following Piper Jaffray’s report despite the revelation that the latest round of firings at the company may not have been performance-based as the company has claimed.
Current and former employees reportedly told CNBC that Tesla is trying to disguise last week’s round of firings as performance-related, but they allege that the terminations seem to be aimed at cuttings costs instead. The San Jose Mercury News reported last week that Tesla had dismissed 400 to 700 workers. However, one former employee now alleges that more than 700 have been fired by now as the terminations have stretched into a second week. The person cited “internal information shared by a manager,” reports CNBC.
The media outlet adds that most of those who were let go were from the motors business. Further, current and former workers allege that those whose employment was terminated tended to be the highest paid employees in their positions rather than those with the lowest performance ratings.
If the allegations are true, it’s interesting that Tesla would suddenly become interested in saving money, given how badly it has been burning cash over the years. The firings come as the automaker struggles with production bottlenecks preventing it from churning out as many Model 3 cars as it has aimed to do.
It’s interesting that Tesla stock climbed by about 1% following CNBC’s report. It either means that investors are rejoicing at the sudden concern about cutting costs or that they care more about the pair of analyst reports focusing on Tesla in China.
In his report on Tuesday, Piper Jaffray analyst Alexander Potter commentary on his firm’s meeting with an electric vehicle trade group in Beijing. After that meeting, he feels that Tesla “has little to fear from Chinese brands, at least based on the current competitive landscape.”
He also believes that the nation’s 2019/ 2020 EV volume quotes probably can’t be reached, which will force automakers to buy credits from high-volume EV sellers. If Tesla does end up building a factory in China, as the rumors have indicated that it will, it should benefit from selling credits to domestic automakers, just as it has in the U.S.
China plans to begin a credits-based quote system in 2019, under which every automaker with production or imports of 30,000 vehicles must accumulate EV credits amounting to 10% of their total deliveries that year. The amount rises to 12% in 2020. Automakers that come up short of their EV quotas will need to buy credits from automakers that sold more EVs than what they need to fill their quote. This will be a good thing for Tesla in China because the company only sells EV. About 24 million passenger vehicles were sold in China last year.
Potter believes that the EV trade group and Chinese policymakers are ignoring EVs’ shortcomings and the reason they don’t meet their quotas. Battery technology and the high price are the issues, but Potter feels that Tesla can easily beat domestic EV makers because its cars are more compelling than theirs. He believes Tesla is “the only EV company that can compete without policy support, although he admits that it has benefited from EV policies there. He disagrees with the bearish view that policies are a must for Tesla in China. Potter has an Overweight rating and $386 price target on Tesla stock.
Nomura Instinet analyst Romit Shah has a Buy rating and $500 price target on Tesla stock, and he set out a pathway for Tesla in China after speaking with the president of Dunne Automotive, which advises automakers and investors on technology in the Chinese auto market.
He believes local production must be set up for Tesla in China so that it can more meaningfully participate in the market. However, this would require the EV maker to do a few things, including give up majority ownership of its China-based group that’s part of a joint venture. Michael Dunne sees domestic brands as being a serious threat to Tesla in China, unlike Potter.
He suggested a partnership with Tencent, which Tesla as a 5% stake in, to protect its patents and leverage political capital. He also thinks the automaker should set up its factory in a free trade zone where it can produce its patented technology components before sending them into the mainland for vehicle assembly.
Tesla stock rose more than 1% to as high as $356.22 during regular trading hours on Tuesday, recovering most of the ground that was lost on Monday.