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The Trade War is Sinking Tesla’s Chances for Profitability

The Trade War is Sinking Tesla's Chances for Profitability

Although neither side of the current trade war between China and the United States has directly targeted automobiles with tariffs, Tesla is still being hurt by the tensions between the two nations. China is a massive (and increasingly the largest) market for all manufacturers, and thus the trade war is spooking everyone. But Tesla is feeling the impact far more than any other carmaker because it has the tightest balance sheet and is the most vulnerable to changes in the current structure.

Tesla’s stock took a beating on Monday, dropping 6.3% and hitting its lowest share price since January 2017. The reason the electric vehicle (EV) maker’s stock is being targeted more so than Daimler (down 3.3%) or BMW (down 1.2%) is because China is a major part of Telsa’s near-term plan to survive. That can’t be said for any other name-brand automaker.

In January, Elon Musk broke ground on a Gigafactory in China, and the total investment in the project is expected to exceed $4 billion, according to Goldman Sachs. This enormous outlay is worth it to Tesla because China represents a clear and immediate path to revenue, something the manufacturer still desperately needs if it is to stay afloat. The company lost $702 million in the first quarter of 2019, which was 2.5 times what Wall Street was expecting. This prompted an almost immediate capital raise of $2.35 billion in stock and debt.

Traditionally, the tariffs for autos imported into China has been a 25% duty. These rates were lowered last year to 15%, but increased to a staggering 40% duty during the first round of the U.S.-China trade war. This necessitated Tesla increasing the price of its automobiles to pass on that tax. The current price for a Tesla Model 3 is approximately $73,000, with roughly $30,000 of that price being the result of China’s import tariffs.

If the current trade tit-for-tat boils over into affecting car imports directly, Tesla could very well see the very tight path to profitability disappear before its eyes. China is increasingly important to every auto manufacturer, and none more so than the newest and most consistent cash-burning carmaker on the block. On the other hand, if the trade war results in permanently reduced automotive tariffs, this current pain could be well worth it for Tesla.

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