In the context of the pandemic sweeping the globe, a large number of enterprises have announced the postponement of the release of their 2019 annual financial reports to alleviate the impact of the pandemic on stock prices. However, Tesla released its Q1 financial report at the end of the first month of 2020Q2, which reflects its confidence in the market performance.
There are two pieces of data in the financial report that can also prove this point: the continually increasing gross margin per car and the unchanged annual delivery guideline of 500,000 cars.
What information is included in the financial report?
As usual, we summarize the information points in the financial report briefly.
Regarding financial data:
- Total revenue of USD 5.985 billion, a decrease of 19% compared to the previous quarter and an increase of 32% year-on-year.
- Automotive sales revenue of USD 5.132 billion, a decrease of 19% compared to the previous quarter and an increase of 38% year-on-year.
- Automotive sales profit of USD 1.311 billion, a decrease of 9% compared to the previous quarter and an increase of 75% year-on-year.
- Total gross profit of 20.6%, gross margin per car of 25.5%, an increase of 3 percentage points from the previous quarter.
- GAAP net profit of USD 16 million, while non-GAAP net profit (excluding stock-based compensation expenses) is USD 227 million.
- Cash and cash equivalents increased by USD 1.8 billion to USD 8.1 billion.
- Free cash flow was negative USD 895 million, of which inventory growth accounted for USD 981 million.
Regarding delivery data:
- Total production in 2020Q1 was 102,672 vehicles, including 15,390 Model S&X and 87,282 Model 3&Y.
- Total deliveries in 2020Q1 were 88,496 vehicles, including 12,230 Model S&X and 76,266 Model 3&Y.
- Inventory days were 20 days, compared to 11 days in the previous quarter.
Regarding factories and production capacity:
- The production ramp-up speed of Tesla’s Shanghai factory exceeded expectations, and it is expected to achieve a production capacity of 4,000 vehicles per week, or 200,000 vehicles per year, by mid-year.- The gross profit of Model 3 produced in Shanghai’s super factory is close to that of Fremont factory in the United States and there is still a lot of room for improvement.
- The Berlin factory has completed land preparation and will start construction soon. According to the plan, the production of Model Y will be realized in 2021.
- Fremont is in the shut-down phase, but the delivery target for this year is still 500,000 vehicles. After resuming production, Tesla is coordinating closely with suppliers and relevant governments because it is uncertain whether suppliers can provide timely supply.
Others:
- The price of the upgraded version of the Standard Range Model 3 will be reduced to below RMB 300,000 tomorrow.
- The Q1 gross profit of Model Y is positive.
- The delivery of Semi is postponed to 2021.
- Battery Day is expected to be held in late May.
- The location of the next super factory will be announced within the next 1-3 months.
Under the epidemic, why can Tesla make a profit?
After the financial report was announced today, Tesla drew attention on social media, with the first sentence being “For the first time in our history, we achieved a positive GAAP net income in the seasonally soft Q1”.
This is a historical moment for Tesla but also for the entire automotive industry. In general, Q1 is the weakest quarter for most automakers, due to holidays, consumer behavior, marketing efforts, etc. Sales decline in Q1 compared to Q4 is expected.
At the same time, there is no need to talk about the harsh environment of Q1 under the influence of the epidemic. Therefore, it is not easy for Tesla to achieve GAAP profit in such a situation.
There are two reasons for this.
First, higher gross profit margin.
According to the financial report, the gross profit margin per vehicle in Q1 has reached 25.5%, an increase of 3 percentage points compared to the previous quarter. The overall gross profit margin has also exceeded 20%. Due to lower marketing and operating expenses, Tesla has a great advantage in overall net profit compared to traditional car companies.
In the Q1 earnings conference call, Tesla also revealed that the gross profit margin of Model 3 produced in the Shanghai super factory is close to that of the Model 3 produced in the Fremont factory in the United States. With the continuous increase in the localization rate of parts, there is still a lot of room for improvement in the gross profit margin of Model 3 produced in Shanghai.
In addition, since Model Y and Model 3 can be produced on the same assembly line, the production capacity of Model Y is ramping up very quickly, and it achieved profitability in the first quarter of production.
Second, the impact of the epidemic on Tesla’s Q1 was very limited.Due to the time difference of the outbreak, the impact of the epidemic on the Chinese market in Q1 was mainly concentrated from the end of January to mid-March, while the impact on overseas markets was mainly concentrated in late March.
Therefore, the greater the proportion of a car company’s business in the Chinese market, the more severe the impact of the epidemic it will face. Conversely, the smaller the proportion, the milder the impact.
In Q4 2019, Tesla delivered 112 thousand new cars worldwide, of which approximately 13 thousand were delivered in the Chinese market, accounting for only 11.6%.
For comparison, Volkswagen delivered a total of 10.97 million cars worldwide in 2019, of which 4.38 million were delivered in the Chinese market, accounting for as much as 40%.
From a delivery volume perspective, it can also be seen that although Tesla delivered a total of 88,400 cars in Q1 2020, a 21% decrease compared to the previous quarter, it increased significantly by 40% compared to Q1 2019, which is the highest delivery volume quarter in Tesla’s history.
In terms of delivery target, Tesla’s delivery guidance for 2020 is 500,000 cars, a 36% increase from 2019. The 40% growth in Q1 not only meets the final target, but also exceeds Elon’s KPI.
Therefore, for Tesla, the impact of the epidemic on Q1 is very limited, and the real impact is in the second quarter. After the Fremont factory shut down on March 25, it has still not resumed operation, and the shutdown time has surpassed one month, corresponding to a production capacity of about 40,000 cars.
However, Tesla has not adjusted the delivery target of 500,000 cars.
The pillar of Q2: Gigafactory 3!
Tesla currently has a total of three factories worldwide for production purposes. One factory with an annual production capacity of 490,000 cars is located in the United States, one with an annual production capacity of 150,000 cars is located in Lingang, China, and one factory, which has just completed land leveling work and is expected to start production in 2021, is located in Berlin, Germany.
In other words, the only factories that can contribute to Tesla’s production capacity are the US factory and the Chinese factory.
First, let’s take a look at the Fremont factory with an annual production capacity of 490,000 cars. It officially stopped production on March 24, and Tesla hoped that workers in the painting and stamping production processes could return to work on April 29, and the factory would resume production as a whole on May 4. However, the lockdown order for the Bay Area was postponed until the end of May, which means that Tesla may have to continue to shut down for another month.
During the conference call, Elon expressed strong dissatisfaction about this, and Tesla also stated that even if production resumes, the factory will face limited production capacity caused by delayed supply chains.It is obvious that the conquest of Fremont factory in Q2 has become a foregone conclusion. In order to continue to deliver 500,000 cars, the pressure has shifted to the Shanghai super factory.
At the end of 2019, the peak production capacity of Giga 3 was 150,000 cars/year when the first phase was just completed. In Q1 2020 financial report, the production capacity has quietly increased to 200,000 cars/year, with the weekly output increased from 3,000 cars to 4,000 cars.
So, capacity can be squeezed, but what about sales?
Cut the price.
For the first time, Elon announced directly during the conference call that the Chinese market-made standard-range plus version of Model 3 will be officially reduced in price tomorrow!
Subsequently, Tesla also officially announced on social media, in order to meet the requirements of national new energy vehicle subsidies, the domestic-made standard-range plus version of Model 3 will be reduced to within 300,000 yuan, and the new price will be officially announced tomorrow.
Although the actual price is still uncertain, it is clear that the post-subsidy price will definitely drop to 270,000 yuan or below.
Although this price reduction does not involve the long-range version of Model 3 made in China, the price of around 340,000 yuan after the subsidy has already attracted a large number of users. What Tesla needs to do is not to cut prices, but to ramp up production as soon as possible.
As for gross profit margins, as mentioned earlier, the gross profit margin of Model 3 produced by Shanghai factory has already caught up with that of the US factory. With the increasing localization rate, there is still a lot of room for improvement.
Therefore, even if demand is depleted in the later stage, Tesla with its high gross profit margin can still stimulate demand through price reduction, so the production capacity of 200,000 cars/year in Tesla’s Shanghai factory does not have too much demand issue.
In the face of the epidemic, the Chinese super factory has stood up, and the Chinese market has also stood up.
In conclusion
Tesla handed in a satisfactory answer sheet in Q1 2020. The severe Q2 is a problem that all automakers have to face, and Tesla’s hope lies in the Chinese factory. Under the catalysis of the epidemic, the construction speed of phase two of Tesla’s Shanghai factory and phase one of Tesla’s Berlin factory will only be faster.
Elon emphasized during the conference call that with the establishment of local factories, local production can effectively reduce vehicle costs. Many automakers cannot reduce vehicle costs and can only cut investments. We are doing the opposite, and we look forward to becoming a truly global company at some point next year.
This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.