The Wall Street Journal

How China's Tariffs Could Disrupt Tesla's Recent Progress


Higher import tariffs in China and other challenges could offset Tesla's recent ratings upgrade and its improved outlook for Model 3 production.

Photo illustration: Laura Kammermann

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00:00 -- Intro
0:44 -- Stocks set to close out 2020 with solid gains
1:50 -- State of Chinese economy one year after a doctor first flagged mystery virus
4:46 -- CNBC Soundcheck
6:23 -- Tarmac or Takeoff?
9:39 -- Numbers Round

… show captions ↓
(light electronic music) - After falling below
Wall Street's earnings expectations in July,
Tesla got a short-term boost.
Moody's Investor Service recently raised
the company's outlook from negative to stable,
largely because Tesla met
its production goals on the Model 3.
But the ratings upgrade is being eclipsed
by higher import tariffs in China.
China's retaliatory tariffs on about
75 billion dollars worth of goods take effect
on September 1st and on December 15th.
They apply to a wide range of products
like clothing, chemicals,
agricultural goods and automobiles.
As one of the major car companies
building a significant number of vehicles
in the U.S. for export to China, Tesla could be hit hard.
China is a critical part of Tesla's long-term strategy,
being Tesla's second biggest market in terms of revenue.
The company touts itself as the next great growth company,
betting that demand in China,
now the world's largest electric car market,
will rise significantly and eventually pay off.
But the tariff hikes could hurt demand
and Tesla's sales in China since Tesla
may be forced to raise prices.
- It's really not a great time
to be expanding a new business into China.
Tensions are escalating,
it's a very fluid situation
with President Trump and President Xi.
The trouble is if you're planning a business,
you need months and even years of lead time
to do a proper expansion,
and we don't have any clarity on what
the next couple hours are gonna look like.
- [Narrator] To save costs and improve margins
amid rising demand in China,
Tesla borrowed a half a billion dollars
to build a new car plant in Shanghai.
The tariffs will come just as Tesla completes construction,
with Model 3 production scheduled
to start by the end of the year.
During Tesla's second quarter earnings call in July,
Tesla CEO Elon Musk continued to promote
the company as a paragon of growth.
- [Elon] We expect growth to continue in the future at,
for several years to come, at the 50% to 100% level.
- [Narrator] But Musk's enthusiasm
doesn't match up with the market reality.
Tesla sales around the world,
including China, are slowing, not growing.
And U.S. sales are expected to be down for the year
and fall short of the 17 million mark
for the first time since 2014.
And demand for Teslas is likely to slow,
since U.S. federal tax credits,
once as high as $7,500 for Tesla buyers,
expire at the end of this year.
And Tesla's debt means the company has less cash
for responding to those pressures.
The company has never turned a profit.
- Revenue growth is the way
to keep the story going for Tesla,
and in the third quarter coming up
analysts expect sales to actually decline
a little bit from a year earlier.
Tesla needs to show that that slowdown
is just a blip and that the future really
is as bright as Elon Musk has claimed.
- [Narrator] Another option is for Tesla
to be less ambitious in terms
of size and sales expectations.
Tesla can thrive in the industry without dominating it.
- There is a real viable business for Tesla in the long run
selling super expensive cars to select buyers
the way they started out,
what got them their brand value in the first place.
The trouble is that's a sustainable business,
but it might not carry a big market value.
Stock investors just won't be as interested
in that as a mass market story.

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