Tesla's Excess Capacity Woes Centered in China
Tesla goes to bizarre extents to prop up output at its Shanghai factory, risking profitability.
Elon Musk visited China in early June and met with top CCP officials. Tesla’s Shanghai factory was undoubtedly a major topic of discussions, given the huge amount of jobs it has created, including suppliers, and its waning capacity utilization. Before his visit, Tesla announced plans of a new battery storage factory in China and launched 9,000 units of exports to Canada, thus reducing output at Fremont, which had supplied the Canadian market up to then.
This report is an analysis of Tesla’s excess capacity problems and how Musk has called for “all hands on deck” to prop up Shanghai while sacrificing profitability at its US and German plants. The extents to which Musk is going to in order to prop up Shanghai may be due to limits on firing local employees and warnings not to further cut prices to spark demand (Tesla started a heated price war in China’s EV market last October which led to deeper losses than expected at Chinese EV start-ups).
Fremont and Berlin Take a Bullet for Shanghai
Tesla is facing an excess capacity problem that could lead to losses if demand for its cars weakens further. The number one priority for Tesla at the moment seems to be keeping its Shanghai factory running at a healthy rate. Q1 was barely so for Tesla Shanghai, with capacity utilization only at 81% (anything below 80% is less profitable, at best, or loss-making, at worst).
And the extents to which Tesla is moving mountains to keep Shanghai above 80% operating rates appears quite desperate:
Exports to Canada Switched From Fremont to Shanghai: Tesla shipped around 9,000 cars per quarter to Canada in 2022 from their Fremont, California factory. From Q2 2023, Shanghai will cover this supply, which will reduce the less-profitable Fremont plant from 88% utilization to 82% or less. Fremont is essentially taking one for the team to save Shanghai and the shipping distance to Canada is nearly 6 times longer at 9,015 km (5,654 miles) from Shanghai versus only 1,556 km (973 miles) from Fremont.
Slow-Rolling Germany’s Ramp-Up: Despite Tesla’s German factory being in dire need of higher production rates (Q1 capacity utilization was only 39%), exports from Shanghai to Europe continued at a firm pace in April and May. TroyTeslike, a diligent Tesla production and delivery tracker on Twitter, estimates that weekly output in Germany during Q2 is only trending at 3,635 units per week (see Figure-1). This is 30% lower than the 5,000/week milestone Tesla said it hit on March 25th and only 44% of Tesla’s stated capacity of 8,000/week. The slowdown in German output might be due to weak Model Y demand in Europe, but TroyTeslike estimates that 37% of Q2 Model Y sales will have been imported from Shanghai. This is clearly support for the Shanghai plant at the behest of the new German factory.
Figure-1: Berlin Estimated at Only 3,635 Units of Weekly Output
Figure-2 shows the massive increase in Tesla’s global capacity by factory in the 12 months from Q1 2022 through Q1 2023. Note that annual capacity in Germany is rounded up to 400,000 and Austin up to 300,000 (Tesla states that Germany is “>350,000” and Austin is “>250,000” in its Q1 deck).
Tesla highly under-states its Shanghai capacity, which is only mentioned as “>750,000” in its Q1 deck. Actual capacity is 1,080,000 units per year, as was reported in detail by the South China Morning Post (paywalled link here) and confirmed by a separate report by Reuters (here).
Figure-2: Tesla’s Annual Production Capacity By Factory
Note the following about Tesla’s current production capacity:
Annual capacity has risen by 70% since March 2022, yet Tesla cut global prices by roughly 20% in January and continues further reductions. This is a massive red flag.
While Austin and Germany were clearly in loss-making territory in terms of capacity utilization in Q1, China was at a fragile level of 81%. So far in Q2, production in April and May were at 91% of capacity, with stronger domestic sales (+35% QoQ) and slightly slower exports (-11% QoQ), but the EU will still see 37% of Q2 sales sourced from China.
Because Shanghai is Tesla’s most profitable factory, exporting makes more money than selling locally in China, where Tesla’s prices are the lowest in the world. But this must be leading to deeper losses at the Germany factory, which could produce more Model Ys to sell in Europe if Tesla wasn’t still importing them from Shanghai. Tesla is clearly propping up Shanghai output to the detriment of its German factory.
Whether Tesla continues to slow-roll its German factory in order to support Shanghai’s capacity utilization remains to be seen. It’s quite possible that it continues if Tesla deems it more profitable than letting Shanghai fall below 80% utilization. But there are no markets big enough in Asia to offset the removal of Model Y exports to the EU (more details below).
China Capacity Expanded by 32% in August 2022
It would’ve been great to have been a fly on the wall during the meeting where Musk gave the green light to expand Shanghai’s capacity by 32% in August last year.
The decision was likely made in late 2021 or early 2022 when Tesla’s market cap trended around $1 trillion and Tesla was on the cusp of printing its highest pretax margin of 19.3% in Q1 2022—a passenger car industry record. Giga Texas and Giga Berlin both started production that spring with 250,000 units of capacity, each, yet Shanghai was adding 260,000 units of capacity later that summer.
The most bizarre aspect of the Shanghai expansion was the 40% increase in the Model 3’s capacity (see Figure-3). Chinese car buyers have more choices of EV brands than any other consumers in the world and the Model 3 is now 4 years old in China (most carmakers schedule full model changes after 5 years, but Tesla has no such plans). During that time, start-ups like NIO have launched 5 new models, while other large “EV whales” like BYD have introduced a similar amount in higher volumes. For the fickle Chinese car buyer, the Model 3 is so old that Tesla has been forced to cut prices by 28% since January 2020.
Figure-3: Shanghai’s Expansion of Weekly Capacity (Units)
Souce: South China Morning Post
Canadian Supply Switched to Shanghai from US
Tesla recently gave the Canadian market to Giga Shanghai to supply at 9,000 units per quarter from April. This takes away production from the Fremont factory, which had been shipping Model 3s and Ys to Canada up to now. If these 9,000 units of shipments to Canada were stripped out of Fremont’s Q1 production, capacity utilization there would’ve been 82% versus the actual 88% result in Q1—not an insignificant drop.
The fact that a carmaker would choose to export the same vehicles to Canada from Shanghai rather than San Francisco shows how much of a priority it is for Tesla to keep Shanghai operating above 80% of capacity.
But adding Canada to Shanghai’s list of export destinations with 9,000 units per quarter doesn’t make up for 30,000 Model Y exports to the EU per quarter, which will eventually stop as Giga Berlin ramps up. And it’s also questionable whether Canada can absorb that amount of imports from here on.
According to S&P Global Mobility, Tesla’s Q1 sales in Canada plunged by 30% versus Q4 2022, despite Tesla’s global sales having grown by 4% QoQ (story here). What’s more alarming is that sales in Ontario—Canada’s largest province—saw the steepest decline of 25% QoQ, with Quebec falling hard as well. If EV adoption isn’t growing in Canada’s two largest provinces, it’ll be hard for Tesla to ship 36,000 cars per year from Shanghai. British Columbia is Tesla’s largest market there, but is likely more saturated with Teslas than California is.
Furthermore, Canadians are less willing to buy EVs than their neighbors to the south: a survey published by J.D. Power on June 29th shows that only 34% percent of Canadians are considering an EV as their next car. This is down from 47% in 2022 and lower than the US level of 61% (story here).
Shanghai Exports Could Fall by 43% YoY in 2H 2023
Tesla will eventually have to cut exports of the lower-end Model Y from Shanghai to the EU in order to allow the German plant to reach 80% capacity utilization. At its current operating rate of 44% of capacity, Giga Berlin is burning cash. Business Insider reported on June 15th that Tesla’s target of 6,000 units of weekly output were put on hold, but Tesla quickly retorted by saying the target was still on, but with less shifts and workers (story here).
The German factory currently employs 10,000 workers and has 400,000 in annual capacity, while Shanghai has 20,000 workers with 1,080,000 units of annual capacity. On an employee per unit capacity-basis, Giga Berlin is 35% overstaffed versus Giga Shanghai.
Assuming Model Y exports from Shanghai go to zero from Q3, Tesla could see a 43% YoY decline in exports and a 10% YoY drop in production during the 2H of 2023. This assumes that domestic sales in China remain at the Q2 estimated run rate of 155,000 units per quarter. Figure-4 shows export estimates by region from Shanghai.
Figure-4: Tesla Giga Shanghai Exports by Region
Note the following points about the export trends in Figure-4:
Q3 exports to the EU drop by 63% QoQ, assuming Model Y exports to the EU stop in order for Giga Berlin to ramp production. The remaining 15,000 units of exports per quarter are Model 3s.
Canada adds 9,000 units per quarter, according to reports of Tesla’s plans
Australia and Thailand are seeing tremendous growth at the moment, but the surge in exports to Australia is said to be a filling of order backlogs, which could lead to declines in the 2H of 2023.
Korea was a large export destination for Giga Shanghai, but demand appears to have fizzled out. Q1 deliveries halved from the previous year. This is partly due to competition from Hyundai/Kia and German EVs, but also because of the Korean government giving Tesla much lower subsidies versus its rivals (Tesla took the majority of Korea’s EV subsidy budget in 2021 and 2022).
Final Thoughts: Tesla Should Close Fremont & Hold Off on New Plants
Tesla clearly has a huge excess capacity problem, yet there is constant talk of building new factories in Europe and South Asia. The Mexican plant which is planned for production of Tesla’s next-generation platform has been delayed by 6 months to Q1 of 2025 due to unforeseen logistical hurdles and higher than expected costs.
Given that Tesla will have no new global models until the Mexican plant is fully operational (the upcoming Cybertruck is likely a niche model that will only be sold in North America, as pick-up trucks have little demand elsewhere), sales of Tesla’s aging line-up should wane. This will lead to more price cuts and, eventually, lower production.
Giga Shanghai clearly has excess capacity now that Giga Berlin has 400,000 units of capacity and needs to utilize it by supplying the greater Euro area—a roll that Shanghai had fulfilled up to now. But Tesla’s US operations are in a much higher state of oversupply. In Figure-5, the key numbers to observe are Tesla’s market share in North America versus its annual capacity as a percentage of North American demand: deliveries only make up 4.3% of the North American market, while annual capacity is equal to 6.3% of demand. At Toyota and Honda, it’s the opposite: market share is higher than supply as a percentage of demand.
Figure-5: Annual Capacity vs North American Demand
Tesla may eventually need to close the Fremont plant, given that it is its least efficient factory. This would not only lead to large write-offs, but also require building new lines at its other factories for the Models S, X and 3 which are produced at Fremont (Tesla’s plants in Texas and Germany only make the Model Y and imports of the Chinese-made Model 3 face 28% tariffs in the US).
With lower exports to the EU and only small markets in Asia/Oceania for Tesla Shanghai’s exports, the key will be China’s local demand for Tesla. Sales have been surprisingly firm in Q2, rising to new record highs. But this may be unsustainable given how old Tesla’s model line-up is for the Chinese market and how many new models are being launched by Chinese rivals, Tesla’s toughest competitors in the world, according to Elon Musk.
Figures 6 and 7 show how tepid auto demand in China is and how much prices are being cut. This doesn’t bode well for Tesla’s aging line-up in China, given the slew of new new models that are being launched.
Figure-6: China’s Passenger Car Market Isn’t Growing
Figure-7: China Price Cuts by Maker
Note: Much of the analysis in this report couldn’t have been done without @TroyTeslike data, which he posts on Twitter. But for deeper insights into his data, I highly recommend subscribing to his Patreon, which is on his Twitter masthead. For £5 per month, it is invaluable for any Tesla investor.
There have been rumor that Tesla SH has applied to expand again but hasn't received approval https://www.teslarati.com/tesla-gigafactory-shanghai-china-450000-expansion/
looks like the gov is concerned about over capacity and also might be unpleasant about Tesla using price war to crush local brands.
Thank you for this article. I think it could be possible that it is more important for Tesla to fulfil strict chinese agreements than to run any factory in a profitable way.
I am waiting for what will happen if demand goes down in a pronounced way even after big price cuts.
If Tesla loses profitability, at least deliveries must grow to keep the story going.
It is amazing how careless people are buying Tesla stock. For shorts always more patience is needed it seems.