Tesla's China Operations Are Getting Crushed

While exports were up by 113% YoY, domestic sales in China were down by 45% YoY, which is bad, given that 75% of Tesla's China output is for the domestic market, where rivals are crushing Tesla.

• Trouble in China: The headline news for Tesla yesterday was that domestic sales in China plummeted 45% YoY to only 18,485 cars in January 2026. While overall shipments from China rose 9% YoY, this was driven entirely by exports, which surged 113% YoY last month.

• Tesla’s exports have peaked in both volume and profitability: Exports from China outweighing domestic sales there would normally be a tailwind for margins (see Figure 1), as Tesla’s China prices are so low they approach break-even levels. Historically, exports “raked in the cash” due to generous export incentives from the Chinese government, which made Tesla’s China exports overseas, where prices are much higher, hugely profitable. However, this equation has been turned upside down.

• Profit margins on exports just shrank by 4 percentage points: Tesla’s aging lineup is colliding with China’s initiative to wean EV makers off subsidies. The VAT rebate for exports from China was recently cut from 13% to 9%, which led to a $1,240 rise in costs per unit. Furthermore, Tesla’s 2025 annual report showed US profits outweighing “foreign” pretax profits for the first time—a staggering shift. While analysts obsess over things like the bill of materials for Optimus, etc., they’re missing this major “domestic vs. foreign” profit flip (see Figure 2), which needs a lot of explaining, given the low profitability of Tesla’s US operations.

• Despite recent “refreshes,” Tesla is forced to cut prices: Model Y sales in China fell from the best-selling electric SUV in December 2025 to 20th place in January 2026. Meanwhile, a Chinese smartphone maker called “Xiaomi”, outsold Tesla’s Model Y by over 2x (39,002 units vs the Model Y sales of 16,845). This comes after only 12 months since Tesla conducted a costly “refresh” of the Model Y, which merely changed the head and tail lights, along with a few interior upgrades. This doesn’t pass as a “full makeover”, which all carmakers do every 2 to 4 years. Musk scrapped the $25,000 entry-level Tesla Model 2 (which would be selling like hotcakes in the US and other markets that suffer from car affordability), but he opted for launching the Cybercab, which will only sell if FSD is approved as a Level 4 self-driving system.

• Giga Shanghai’s shrinking export markets: Exports are shrinking as a percentage of total production because Tesla has the oldest lineup in the industry. To move these aging models, Tesla has been forced to cut prices heavily in its primary export hubs. Figure 3 illustrates this: in every market that grew over the last two years, Tesla sacrificed price (e.g., Korea and Japan). Oceania serves as a cautionary tale; despite price cuts, 2025 sales of 31,612 units were 31% below the 2023 peak, and January 2025 sales were down by 36% YoY.

• Korea is Giga Shanghai’s primary “channel stuffing” region: Local media now describes South Korea as Tesla’s “clearance outlet.” On the final day of 2025, Tesla slashed Model Y prices in Korea by 21% ($9,258) and Model 3 prices by 15% ($5,403). Remarkably, the Model Y is now 5% ($1,057) cheaper in Korea than in China. With 2025 sales in Korea already 610% above 2021 levels and BYD entering the fray, further growth for Tesla in Korea appears unlikely.

• Thailand registrations in January exceeded all of 2025: Tesla sold 5,800 vehicles in Thailand last month, surpassing its total 2025 deliveries of 5,049. This was a “pull-forward” event caused by the tightening of Thai EV subsidies on February 1, 2026, which effectively raised Tesla’s average price by $8,000. Tesla is now sitting on massive inventory in Thailand. While they introduced “Standard” (lower-spec) versions on January 17th to lower the entry price, they still face an 8% excise tax disadvantage compared to BYD, which produces locally.

• Cutting prices as raw materials spike: Battery costs are rising sharply. The price of Lithium Hydroxide (US models) and LFP materials (all other models sold outside of the US) has increased the cost per Model Y by roughly $6,765 in the US and by at least $838 in markets outside of the US. While Chinese rivals can offset these costs with massive volume growth, Tesla’s dropping volumes suggest it will likely face losses and significant cash burn in 2026.