China factory production key as Tesla reports third-quarter results

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By Yilei Sun and Vibhuti Sharma

(Reuters) – Tesla Inc (O:) is conducting trial production runs at its new $2 billion China factory for the past several weeks and will sell some of the first cars from the plant to its employees, sources told Reuters.

Whether billionaire Elon Musk’s flagship company can start mass production quickly enough to hit stated targets is the question investors will want an answer to when Tesla announces third-quarter results on Wednesday.

The U.S. electric vehicles maker is under pressure to ramp up output globally, and the Shanghai plant’s production schedule is crucial if it wants to reach its ambitious target of an annualized production rate of 500,000 vehicles by the end of the year.

Tesla last week obtained the certificate it needs to start manufacturing cars in the country. But analysts contend that uncertainties around labor and suppliers make it a challenge to start mass production.

“There is a lot in the equation that is not in their control,” said Tu Le, analyst at China-based research firm Sino Auto Insights.

“There are some things that just need time in order to complete, like qualifying new manufacturing processes, a new battery supplier, getting the tooling shipped and set up, as well as setting up all the suppliers. Any parts that have to be imported need to go through customs, which also could mean delays,” he said.

Tesla is also in the process of obtaining a key certification needed to sell China-made cars in the country, it told local media, though it is unclear when the government will grant it sales clearance.

Tesla did not reply to an email seeking comment.

It said in April it aims to produce at least 1,000 Model 3 cars a week at the new factory by the end of this year.

Analysts, though, are doubtful that Tesla will hit this target, given its patchy production record.

Delays and quality issues have marred the launches of Tesla’s Model S and Model X vehicles in the past, and Tesla struggled to start making the Model 3 at its California factory in 2017.

The company took six months longer than originally forecast to hit a target of 5,000 Model 3 cars per week, achieving that pace about a year after launching production.

Still, Tesla is taking steps to ensure a smooth launch of production, including trying to diversify its battery supplier base, sources have said.

It recently bought Maxwell Technologies, whose technology could help the car maker produce batteries that last longer.

At hiring events in Shanghai in August and September, attended by Reuters journalists, Tesla interviewed hundreds of candidates from mainstream car makers in China.

It also advertised on social media for battery-related production and software system engineers in Shanghai, and delivery managers in big Chinese cities.


China, for its part, is helping speed up things at the Shanghai factory – the country’s first fully foreign-owned car plant, a reflection of Beijing’s broader shift to open up its auto market.

State-owned construction companies have arranged extra workforce and banks are offering cheap loans, while the government said it will exempt Tesla cars from its purchase tax, a concession made amidst trade tensions with the United States.

The Model 3 has fared well in China, the world’s biggest car market.

Tesla sales in China likely surged more than three fold to 10,542 cars in the quarter ended Sept. 30, according to research firm LMC Automotive.

The company expects to deliver 360,000 to 400,000 cars this year globally.

Analysts expect Tesla’s third-quarter revenue to decline 7% from the year-ago quarter, according to Refinitiv data. They predict a loss of 42 cents per share, excluding one-time items, in contrast to Musk’s promises that the company would break even in the quarter.

Gross margins likely shrank to 15.6% from 22.3%.

“The biggest overhang around the story is the ability to hit profitability and to achieve its ambitious unit guidance for 2019,” Wedbush analyst Dan Ives said in a pre-earnings research note.

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