Reply To: Tesla Reports Optimistic Outlook with Record Revenue and Orders


Earlier in the week we saw Bloomberg broke a story that Tesla is cutting its December Model Y production by 20% at its Shanghai plant. TSLA has since refuted the story, but the stock traded sharply lower, signaling that investors remain uneasy about the demand situation.

The report follows a 5-10% price cut in October for TSLA’s Model 3 and Model Y in China, and this ominous tweet from Elon Musk on November 30: “Trend is concerning. Fed needs to cut interest rates immediately. They are massively amplifying the probability of a severe recession.”

A slowdown in demand would be especially problematic because TSLA has aggressively ramped up its production. Not only is the company boosting output at its recently launched Austin, Texas and Berlin, Germany facilities, but it also recently modernized and reconfigured its Shanghai plant to increase production.

In fact, Shanghai churned out a record 100,290 vehicles in November, according to CPCA data, which represents a new monthly record for TSLA.

The good news is that higher production leads to greater manufacturing efficiencies, which is a positive for automotive gross margin and operating margin. In Q3, automotive gross margin remained flat sequentially at 27.9%, despite facing a difficult comp in Q2 when ASPs jumped due to a lower mix of production coming from Shanghai. However, if demand wavers, the increase in output could translate into ballooning inventory levels and ultimately more price cuts and sagging margins.