Tesla has taken another step on the road to localization, following the launch of delivery of domestic models. On February 3rd the Ningde Times announced that it was entering into an agreement with Tesla to supply powered battery products to the latter. Industry insiders say the price of the domestic Model 3 model is expected to fall further, Tesla’s gross margin is also expected to improve, and the Chinese market will increasingly become an important source of Tesla’s continued profitability after it is domestically supplied with key components, including power batteries.
Ending Panasonic’s Dominion
On February 3rd, the Ningde Times announced that it intended to work with Tesla, Inc. and the signing of the Production Pricing Agreement (China) by Tesla (Shanghai) Co., Ltd. It was agreed that the Ninder era would supply Tesla with lithium-ion power edibattery products. Currently, The Ninder Era, Tesla, Inc. The Agreement has been signed and still needs to be signed by Tesla (Shanghai) Co., Ltd.
Regarding the specific purchase amount and quantity, Ningde Times said in a statement that within the agreed period of the Agreement, Tesla will purchase lithium-ion power batteries from the Ningde era, the specific purchase situation Tesla will be based on their own needs in order to determine, the agreement does not impose restrictions on Tesla procurement volume, The final sales amount shall be subject to the actual settlement of the purchase order issued by Tesla.
Panasonic is understood to have been Tesla’s exclusive power battery supplier since 2009. However, as demand for the Model 3 has grown over the past two years, Tesla and Panasonic are starting to clash. Tesla CEO Elon Musk has said production of the Model 3 has been affected by Panasonic’s capacity. Panasonic Electric CEO Yoshihide Suga said the company had underestimated the risks of working with Tesla and was struggling to make a profit from its existing battery business, citing no plans to build a new battery plant in China.
In January 2019, Panasonic signed a contract with Toyota to look for new market opportunities, and in April, Panasonic halted plans to expand its Gigafactory 1 battery plant and suspended investment in Tesla’s Shanghai plant, sending relations cooled rapidly.
Model 3 Gets More Price Reduction Space
It is worth noting that the introduction of the Ninder era as a power battery supplier behind the Tesla to promote the Model 3 localization process. Song Gang, head of manufacturing at Tesla’s Shanghai plant, revealed that the current localization rate of parts at Tesla’s Shanghai Super plant is about 30%, and plans to increase to 70%-80% by July 2020, with the domestic Model 3 to be domesticated by the end of the year.
The increase in localization means that more Chinese companies will become Tesla suppliers. According to statistics, in Tesla’s global supply chain, involving more than 130 Chinese suppliers, Chinese enterprises accounted for more than half.
“The biggest cost of new energy vehicles lies in the battery, motor, electronic control ‘three electricity’ system, and the cost of power battery is the most important. Cui Dongshu, secretary-general of the Passenger Vehicle Market Information Association, said lowering the cost of power batteries and introducing higher-quality products were important for Tesla’s domestic process.
Previously, the Tesla Model 3 had been using cylindrical batteries, while the Ningde era produced mainly square batteries. It is understood that the square battery is currently the most widely used power battery form, the market more than 90% of the pure electric vehicle type are using the battery. As for what form of batteries Tesla will purchase from the Ningde era, a reporter from the Beijing Business Daily contacted Tesla officials, but as of the press release, has not yet received a reply from the other side.
Zhang Xiang, an auto industry analyst, said that from a cost perspective, Ningde-era batteries, as China’s number one power battery supplier, have a more price advantage at home.
In January 2020, Tesla reduced the price of its domestic Model 3 model from 355.8 million yuan to 323,800 yuan, plus 24.75 million yuan of state new energy subsidies, the actual price of the model is about 299,000 yuan, the first time down to 300,000 yuan. In addition, as an all-electric Model 3, you can also enjoy license offers from first-tier cities. Data show that the Shanghai license plate transaction price has exceeded 90,000 yuan, Shenzhen license plate price has exceeded 60,000 yuan.
“With Tesla’s higher localization rate and capacity climbing, there is still a lot of room for future Tesla domestic models to explore prices.” Cui Dongshu believes that in the second half of 2020, the price of the domestic Model 3 model is expected to drop to about 250,000 yuan. Domestic models will be 10% cheaper than the $35,000 U.S.-made Model 3.
Scale-on-scale effect-controlled cost control
In fact, localization will not only allow domestic models to cut prices again, but also help Tesla reduce costs. Tesla reported revenue of $7.38 billion and net profit of $105 million in the fourth quarter of 2019. Tesla’s gross margin has fallen despite another two-quarter profit. In the fourth quarter of 2019, Tesla’s combined gross margin was 18.8%, down 0.1% month-on-month, while vehicle sales were 21.6%, down 0.2% month-on-month.
Behind the decline in gross margins is the excessive growth in costs. In the fourth quarter of 2019, Tesla’s revenue from its auto sales business was $6.143 billion, up 14.75 percent from a year earlier, and revenue from the auto sales business was $4.815 billion, up 19.95 percent from a year earlier.
According to statistics, Model 3 fully domesticated, raw materials (parts) can save 10%-20%, manufacturing costs reduced by 50%, labor costs reduced by 75%. According to this calculation, the total production cost of the Model 3 model is expected to decrease by 20%-28% after the domestic production. This means that the gross margin of the domestic Model 3 model will reach 35%.
However, in addition to the localization rate to be high enough, the Shanghai plant to achieve a significant reduction in costs, but also need to reach a large enough scale of production and marketing. “As a new production base, Tesla’s Shanghai plant may not be as efficient in the early stages of operation, ” said Song Qinghui, an economist. Only after the domestic Model 3 model enters the relatively mature release stage, the Shanghai factory will achieve the scale effect, when the gross margin of the model may gradually reach a better level.”
Tesla is ambitious in its sales outlook for the Chinese market. Previously, Tesla had set a “small target” of 2020, with annual deliveries of more than 500,000 vehicles.