just began offering a lower-priced version of its Model Y crossover vehicle in China. Cutting prices could be a sign there is a demand problem for the electric-vehicle pioneer in China. That isn’t likely the case, however. And Wall Street regards price cuts from EV manufacturers along established thoughts on demand and profit margins for the sector. Investors may want to look for a neutral party to set their expectations about what a cheaper Model Y means.
The new standard-range version of the Tesla (ticker: TSLA) Model Y is at 276,000 Yuan, or about $42,600, and has a range of about 525 kilometers, or 328 miles, on one charge. U.S. investors should know that Chinese officials calculate per-charge range differently than U.S. officials.
J.P. Morgan analyst Rebecca Wen covers Chinese automotive technology, but not Tesla itself. Wen represents a neutral party. She noticed the Model Y price cut, however, and commented on it in a Thursday research report. She said the new pricing is competitive, and pointed out that the new Model Y likely has a new iron phosphate lithium ion battery. Tesla didn’t respond to a request for comment about pricing or the battery.
Wen writes that the Model Y is the top-selling Model in China, excluding some smaller, lower-priced EVs, and “with the [Model Y] lower price and, hence, a larger addressable market, we believe there could be meaningful volume increases,” She noted that Chinese Tesla Model 3 monthly sales volume rose from about 12,000 units a month to 18,000 units following the introduction of a lower-range version of the Model 3 equipped with iron phosphate batteries.
Iron phosphate batteries are cheaper and less powerful than top-of-the-line lithium ion batteries. Chinese EV maker
(XPEV) was heralded for offering a cheaper version of its cars by introducing the same type of battery back in March.
Morgan Stanley analyst Tim Hsiao wrote that the XPeng battery decision a smart strategic move, giving the auto maker the option to lower vehicle prices or the ability to offer more features for the same price. Back in March, Hsaio rated XPeng stock Buy and had a $70 price target. He still rates shares at Buy today, but his price target is down to $57.
The cheaper batteries could lower the XPeng vehicle cost by about $3,000 to $5,000, or roughly 10% off recent list prices that average about $40,000. The next version of the Chinese Y runs about $54,000.
GLJ Research analyst Gordon Johnson feels differently about the decision to cut prices, believing it hints at a demand problem. Johnson wrote Thursday that he sees Tesla’s cut as a “desperation lever to try to drum up demand in a market where it is falling severely behind.”
Tesla is growing in China. It made, and sold, more cars from its Shanghai plant in the second quarter than it did in the first quarter. But the company also exported far more of its Chinese production to Europe. Tesla deliveries, and market share, in China fell during the second quarter.
It’s hard to call that a demand problem though. Tesla, to this point in its history, has always sold everything it could make. It has never cut production because of falling demand. That happens at mature, traditional auto makers when sales fall. But Tesla serves the globe out of just two plants, one in Shanghai and the other in Fremont, Calif. Where Tesla’s production ends up is anyone’s guess.
Still, Tesla’s Chinese market share is a watch item for both Tesla bulls and bears. And a cheaper Model Y should actually help, not hurt, its share.
Johnson is a noted Tesla bear, and rates the stock at Sell with a $67 price target.
The Model Y price cut isn’t impacting Tesla stock much. Shares rose about 1.3% Thursday, while the
Dow Jones Industrial Average
both dropped almost 1%. Tesla stock is down 0.4% Friday, while bot indexes are up more than 1%. Not that much has happened to Tesla stock based on the recent Chinese news.
Write to Al Root at firstname.lastname@example.org