The Shine Comes off Tesla: Welcome to Reality

Losing Market Share in all Major Markets

After the one-time bounce of the big price cuts at the start of the year, Tesla’s market share has been falling in all of the three major global car markets. Fundamentally, this is an issue of aged models and increasing competition with even VW starting to get its act together. The Model X and S just keep getting longer and longer in the tooth (hence the ongoing significant price cuts), the Model Y (the major contributor to sales) will not get a facelift until mid-next year and the facelifted Model 3 may only provide a small sales bump.

In China, multiple very good and very well priced Model Y competitors have come to market in the past few months, as well as a number of Model 3 competitors. In the US and Europe, the German manufacturers are certainly getting their act together, as are the Korean manufacturers. Next year Geely-Volvo will be introducing extremely competitive models into Europe, Australia and the US, and other manufacturers such as MG and BYD will be an increasing problem in Europe and Australia.

MG has even brought out the equivalent of the Roadster, called the “Cyberster”, that Tesla has been promising for so long; the Roadster is still “in development” as per the Q3 earnings call.

And other Chinese manufacturers are not to be outdone by MG.

Tesla Market Share in 2023:

US BEV: Q1 62%, Q2 57%, Q3 50% and Q4 possibly as low as 44% (vs 62% Q4 2022). – 650,000 cars sold

China BEV+PHEV: Q1 10%, Q2 8.4%, Q3 6.4%, Q4 as low as 5.3% (vs 6.5%) – 596,000

Europe BEV+PHEV: Q1 14%, Q2 12.1%, Q3 11.8%, Q4 as low as 11% - 380,000

MG and BYD are also busy invading the next biggest market, Australia. BYD has upped the stakes with its recent introduction of the incredibly low-priced Seal in Australia – a Model 3 competitor. Will it be bringing its Model Y competitor, the BYD Song L, to Australia next?

Cybertruck and Model 2 Not Coming to the Rescue Anytime Soon

On the Q3 earnings call, Elon Musk made it very obvious that shipments of the CyberTruck will be very slow and take into 2025 to get fully ramped up. He actually stated that “I think we’ll end up with roughly a 0.25 million Cybertrucks a year. I don’t think we’re going to reach that output rate next year. I think we’ll probably reach it sometime in 2025”. So only an additional 250,000 sales a year, and then not until 2025! A damp squib after all the hoopla.

He also made it obvious that the Model 2 will be coming even later than previously thought, i.e. not until 2025 for the US and even later for that for Europe and China. He stated:

In Mexico we’re laying the groundwork to begin construction and doing all the long lead items. But I think we want to just get a sense for what the global economy is like before we go full tilt on the Mexico factory. I’m worried about the high interest rate environment that we’re in. I just can’t emphasize this enough that the vast majority of people buying a car is about the monthly payment. And as interest rates rise, the proportion of that monthly payment that is interest increases naturally.

He is basically stating that at current more normalized interest rates Tesla cannot produce a Model 2 that will be affordable to the target consumer group. The Chinese manufacturers are already making money on cars far, far below the US$25,000 price point that Tesla is aiming at. For example, the BYD Seagull at half that price:

Or all of these, Chinese manufacturers are the leaders in producing cheaper still good EVs. Looks like they will have more than an additional two years before Tesla tries to compete in the space below the Model 3 in China and the rest of Asia, and at least a couple of years to start dominating this space in Europe.

This means that in 2024 Tesla will have a facelifted Model 3 and from mid-year (if Musk’s forecast is to be believed) a facelifted Model Y in all markets; still pretty much a 2-model company. That reality will continue in 2025 for Europe and perhaps even in 2026 for China. This is a recipe for continuously falling market share, possibly to utter niche irrelevance in at least China. 2024 and 2025 will also be the increasing invasion of Europe by the Chinese plus many new models brought out by European and South Korean manufacturers – while Tesla pretty much stands still model wise.

The X and S are niche ageing models that are now looking significantly over-priced given competitive offerings such as the Kia EV9 and the Xpeng P7. Tesla has no plans for new models to replace these, so we should expect an ongoing challenge to maintain sales levels and more price cuts.

Margins Collapsing Down to Standard car Industry Averages

Many Tesla bulls have been believing that Tesla could take 30% of the global car market while keeping the ridiculously high margins of 2022. This belief has been slammed into reality in 2023, with the inevitable collapse down to industry standard level margins; something required to move from a niche producer to a major producer. The net operating margin has fallen quarter over quarter:

Tesla Net Operating Margin:

Q3 2022 17.2%

Q4 2022 16%

Q1 2023 11.4%

Q2 2023 9.6%

Q3 2023 7.6%

With this trend Tesla may be losing money on an operating basis by Q3 next year, and the US economy isn’t even in a recession yet! The vaunted “Tesla productivity advantage” has been shown to be a mirage as BYD now equals Tesla margins while selling at a much lower average cost (driven by its much wider product range, including the US$10,000 Seagull!) and predominantly in the most competitive Chinese market.

The reality is that Tesla may struggle to keep market share at above 5% in China and 10% in Europe in 2024. In the US, we could be seeing a decline to 30% market share by Q4 2024 – and that’s even without the entry of the Chinese manufacturers (except Geely-Volvo). Sooner or later, SAIC-MG, BYD etc., will start building plants in North America and pushing that market share down further.

Musk Gets Real on Full Self Driving and Robo-Taxis

After promising that complete hands-free FSD (Full Self Driving) will be with us shortly year after year since 2017, Musk is suddenly coming to terms with the fact that the last 10%, 5%, 1% etc. of perfection may take as long as the first 90% and may not even ever be achieved! He attempted some BS about why the FSD price was cut, but the reality is that it was cut because less people were buying it. Just like all the other price cuts, this was not a strategic genius decision but a tactical response to changing circumstances.

If no full hands-free FSD, then no robo-taxis (also promised since 2017) and therefore no magical amounts of extra revenues, and Tesla is just a run of the mill car company. The next sparkly object Musk is attempting to wave in front of investor faces is “AI”, but that is utterly ridiculous given Tesla’s underwhelming demonstrations and the gap between it and the true leaders in the field. No more sparkly objects means that Tesla is just a run of the mill car company.

The Share Price Reflects Delusional Thinking

So, what if Tesla ends up at standard auto industry margins and with let’s say a Toyota (the current market share leader) share of 11.5%? Toyota is currently valued at a price/earnings ratio of 12 which is quite high for the industry resulting in a valuation of US$245 billion. Tesla is currently priced at a P/E ratio of 70, resulting in valuation of US$810 billion. Tesla’s valuation would have to be reduced by 70% to match that of a Toyota that makes 60% more in net profits than Tesla currently does.

Taking into account that it will take time for Tesla to match Toyota’s current profits, and is already getting close to matching Toyota’s current growth rate, we will need some discounting to produce a present value equivalence. We could be talking about an 80-90% lower share price being required to match a possible best-case future, one which may be too optimistic. Tesla does not even have an 11.5% market share in China plus Europe, and its share in the US may continue to fall toward its level in those two countries. Tesla does not have anywhere near a full suite of models and has shown itself to be very slow in bringing new ones to market. Without a full suite of models, it cannot be expected to equal Toyota’s market share.

Whichever way you look at it, Tesla stock is in a massive bubble and this year’s bounce off the US$100 will quite possibly have been the last hurrah before the fall to even lower valuations. Rising interest rates just add to the woes by both slowing demand and by increasing the discount rate used on future earnings.

Will All the Major Global Car Makers End Up Being Chinese?

BYD already replaced Ford as the fourth biggest global car manufacturer in August 2023, with a 4.8% market share. Given its sales growth momentum, it will very soon overtake Honda which is currently at 4.9% and then VW currently at 6.5% sometime next year. Especially if VW cannot arrest its rapid sales collapse in China, its biggest market. Toyota is the current global market leader, at 9.8% but is one of the least prepared for the rapid move to EVs from ICE vehicles; it could be dethroned by BYD in 2025. Toyota’s incredibly bad decisions with respect to the transition to EVs may create an incredibly difficult next few years for the company; perhaps even an existential crisis. The same could be true for the other Japanese car manufacturers, which will have major geopolitical impacts given the importance of the car industry to Japan.

Toyota is acting like the producers of Betamax in the 1980s, not understanding that VHS had already won the videotape format war; doubling down on a losing strategy and not understanding the self-reinforcing effects of a dominant standard. If they don’t wake up they may be soon losing market share at an accelerating pace. This video perfectly displays the delusional Toyota position, the EV train is leaving the station and Toyota needs to jump on it while it still has a chance.

Tesla sells less than half the number of cars that BYD does and is suffering from rapidly diminishing margins and sales momentum. There is a lineup of Chinese EV manufacturers vying to follow in BYD’s footsteps. Geely-Volvo, GAC-Aion, Li Auto, and SAIC (SGW, MG and Polestar) threaten to overtake Tesla in the Chinese EV market in 2024. With the China market becoming nearly fully EV by the end of 2025, there will be an absolute avalanche of Chinese car exports by then. Any Chinese brand gain will be a loss for the other manufacturers, and we could also by then be seeing Chinese car manufacturing plants proliferating in both Europe and North America.

The geopolitical impact of Chinese dominance in the most important manufacturing industry of vehicle manufacturing, together with the concomitant decline in Western manufacturers (including possibly even Tesla), will cause huge strains between China and the Western nations and within such Western nations as Japan, Germany, France and the United States. The psychological impact on the Western supremacist worldview will also be significant. We can expect “voluntary” import restraints and a push for localized manufacturing plants in Europe.

Chinese car manufacturers have already overtaken US ones in the Mexican market an could possibly do the same with Canada, but in the US such dominance may be deemed a national security issue, with Chinese brand share being explicitly limited. It may be that the equivalent of the German “Trabi” will be found in a protectionist and paranoid United States by the 2030s!

What would happen if Tesla were to be eaten alive by the Chinese and other non-US manufacturers in the next five years, ending up like DeLorean as the Elon Musk critic Thuderf00t proposes below? The impact to the US supremacist image of itself may be shattered, with a new “Yellow Peril” racist response, as when Japan threatened US car and technology manufacturers in the 1980s and 1990s.