Tesla's stumble is China's gain
Tesla needs to stop the bleeding now and brand rehab is the most obvious first step
Initial numbers for EV sales indicate Tesla took a step backward in Q1 2024. On the day of the release, there were many reports that Tesla has overplayed their hand and this time they will finally snap back to reality and head toward a valuation more in line with other carmakers. Let’s dive into what was reported, compare it to the market’s reaction, and get into Tesla’s branding flaw.
Falling behind in China
The X account TroyTeslike might be the best Tesla analyst there is and he overestimated Tesla’s delivery numbers by his worst error yet:
What’s more, production numbers were relatively in line with expectations, retreating to Q3 2023 levels. This drop in sales looks to have caught Tesla off guard because they announced a price increase to try and pull forward Q2 demand in March. This didn’t work and Tesla has more EVs on hand than they have in recent memory. They weren’t the only ones taking a step back in EV sales. Ford put out this in their Q1 preliminary results press release:
Ford sold 20,223 EVs in Q1, making Ford America’s second best-selling EV brand behind Tesla for the quarter. Mustang Mach-E posted strong Q1 sales of 9,589 SUVs – up 77 percent over a year ago.
Wholesale for Ford’s EVs in Q4 was 34,000, so this is a sequential step back, but the same thing happened last year. In Q1 2023 Ford sold 12,000 EVs, a 36% drop from Q4 2022. It’s a bit early to trust the trend from Ford, but here’s what Tesla delivery versus production historically:
In Q2 2022 and Q3 2023 Tesla dropped production more closely in line with the drop in sales. There have been some surprises to the upside with production over time, but the outlier is the latest quarter.
Looking at the percent change, I believe there is something fundamentally different going on with Tesla this time. They knew sales would drop some and cut back production with a justification that they would be working on their new compact car. This is the first time they have missed estimating their production cut by this much. In the coming weeks, I suspect we will find out that Tesla is continuing to lose share in China where as recently as June 2023 they accounted for half of the EV sales. BYD is passing Tesla and the popular Xiaomi brand is entering the Chinese EV market. Branding is supremely important in carmaking but more on that in a moment.
A continued need to diversify
Another bit from Tesla’s press release caught my eye about energy storage:
We deployed 4,053 MWh of energy storage products in Q1, the highest quarterly deployment yet.
The previous high mark for energy storage was 3,980 MWh in Q3 2023. Storage deployments increased 125% from 2022 to 2023 for Tesla. This was their fastest-growing revenue area in 2023, where they combined with a shrinking solar business to grow 54% year over year. That business is not yet profitable, which makes sense as they pour money into scaling. Utility-scale battery storage is expected to skyrocket in the next two years and Tesla is a major player in the space. This and the home battery business that is already contributing to the rise of virtual power plants.
I talked about the potential here in my deep dive into their business:
Finally, the big story from earnings for me is the continued growth in energy storage and generation. We've heard what a big year it's going to be for utility-scale battery deployment and Tesla went from $3.9B to $6B in revenue on these products in the past year. Tesla didn't offer any official guidance that I could see on what that number will be in 2024, but I would watch it closely in Q1's earnings.
This unexpected hiccup in EV sales will have me watching the Q1 earnings even more closely than before. In all likelihood, lost ground in China isn’t coming back to Tesla. They will need to lean into their advantages in storage as well as charging to maintain their lofty valuation that has fully rebounded after taking a hit following the Q1 production announcement last week.
Brand importance on the rise
There are plenty of news stories that don’t make sense around EVs right now such as claiming that EV demand is slowing at the same time as competition is ramping up. We’re seeing hard numbers that places like North Carolina are hitting EV adoption goals well in advance and that’s not because the US is buying fewer EVs. Even car dealership folks are in love with used EVs as a way to sell to the lower end of the market, indicating there’s lots of room to run as EVs come down the cost curve. It’s an environment full of hot takes where a well-loved brand will rise to the top over competitors mired in controversy.
However, it appears that Tesla CEO Elon Musk has decided to double down on a public persona shift that continues to move away from an eccentric entrepreneur and toward an anti-immigration conspiracy theorist. All cars, even EVs, are helping their users transport their passengers and cargo from one place to another. Everything else on top is branding. It doesn’t matter if you have a big screen on the dashboard or a cup holder that keeps your coffee warm. Those bells and whistles are part of a larger brand that ultimately determines if a consumer purchases one car over another but the perception of leadership matters at least as much.
Perhaps Elon believes that a shift in public persona is necessary to go from selling SUVs and sedans to mostly the affluent, left-leaning customer base that Tesla currently has to sell Cybertrucks. I doubt he has developed new passions that he feels he must now vocalize or that he believes this helps his other businesses. However, if Q2 looks like Q1 for Tesla’s EVs, I would expect to see a branding shift from Elon or a CEO change from Tesla. No matter how optimistic I am about their storage business, they cannot lose their dominance EV market in the US and expect to grow into their current valuation. Consider last week’s stock dip and subsequent recovery a warning shot to leadership.