THIS MATERIAL IS A MARKETING COMMUNICATION.
Tesla’s Future and ESG Charge Ahead
Tesla is now the most valuable car company in the world by market capitalization, having overtaken Toyota, despite having been projected to sell less than 5% of the latter’s volume for 2020 and accounting for less than 1% of total global volume. Tesla is seen as a key disruptor in the auto space, stemming from its focused all-battery electric vehicle strategy without a need to protect the profitability of a legacy internal combustion engine (ICE) business, as well as being an innovator in battery technology and pioneer in autonomous driving.
At the same time, the world is moving undeniably closer to a low-carbon automotive future. Electric vehicles (EVs) are increasingly seen, even by major manufacturers who still rely on an ICE, as an attractive (and eventually low-cost) way to make this future a reality. The challenge from an environmental, social, and governance (ESG) standpoint is in how EV manufacturers, and especially Tesla, will be able to ensure that they as well as their supply chains remain committed to reaching these goals in a domestic market where there will soon be further home-grown competition. Nonetheless, investments in EV manufacturers, including several others apart from Tesla, are ascending in popularity for ESG investors everywhere, with no signs of this interest abating.
Of key importance, Tesla has demonstrated a legitimate pathway to profitability for electric vehicle (EV) start-ups and has successfully overcome early execution and ramp-up issues. The market expects Tesla to continue gaining market share in the premium auto space and further penetrate the Chinese market. As Tesla looks to extend its leadership in battery technology and further lower its cost base to remain competitive, we believe that setting up a factory in China will allow Tesla to be closer to its supply chain and fully tap into the capabilities of China’s burgeoning EV supply chain.
Tesla’s Shanghai factory is the company’s first car manufacturing site outside the US and key to Elon Musk’s ambition of boosting sales in the world’s largest auto market while avoiding high import tariffs on US-made cars. The new factory (known as Gigafactory 3) is also the first fully foreign-owned auto manufacturing plant in China. Tesla will produce mainly the Model 3 (sedan) and Model Y (compact SUV) for the Chinese market. Tesla’s Model 3 was the top-selling plug-in car in 2019 with close to 14% market share, according to Insideevs.com.2 The goal is to ramp up production to as many as 500k vehicles per year in two to three years. As around 70% of Tesla’s components for production in China are still sourced from overseas, it makes sense to localize production to improve margins or lower the average selling price, depending on the strategy Tesla chooses in China.
Tesla’s Timeline in China
- Oct 2018 – Tesla obtained the right to use 1,200 acres of land in Shanghai Lingang from the Shanghai government for a total of Rmb973mn, which was used for Tesla’s first Gigafactory outside the US.
- Jan 2019 – Tesla held the groundbreaking ceremony of the Gigafactory and started construction.
- Aug 2019 – Tesla’s Shanghai Gigafactory was granted the first comprehensive acceptance certification.
- Sep 2019 – Tesla’s Shanghai Gigafactory passed the second government acceptance check.
- Oct 2019 – Tesla’s Shanghai Gigafactory received the manufacturing certification and started the production of Model 3.
- Dec 2019 – The Chinese-made Model 3 Sedans were officially delivered at Shanghai Gigafactory to employee customers.
- Jan 2020 – The Chinese-made Model 3 Sedans were officially delivered to outside customers; Tesla started the manufacturing of Model Y.
China further reduced subsidies for EVs by 10% in 2020 and made lower subsidies only available to EVs that cost less than Rmb300k. This caused Tesla to cut the starting price of its Chinese-made base model of the Model 3 to below Rmb300k to qualify for these subsidies. The company also cut the price of its longer-range model to offset the subsidy removal as the car otherwise still would have cost more than the Rmb300k threshold required to qualify. This move increases Tesla’s need to lower costs to maintain and improve margins.
According to an interview held with Bloomberg News, Song Gang, Tesla’s manufacturing director of its Shanghai plant, said that Tesla plans to increase local sourcing to 100% by the end of the year from the current 30%. We believe this will benefit the domestic supply chain in China from the import substitution trend. That said, expectations should be tempered given Tesla’s lower level of component outsourcing versus traditional ICE cars (with the majority of costs being allocated to battery makers) and its still-small production volume as a percentage of China’s total passenger vehicle (PV) market. UBS earlier forecast Tesla’s 2020 production volume to account for just 0.5% of China’s PV volume and to reach 2% based on Tesla’s three-year plan to produce 500k units per year.3
Some of the key suppliers to Tesla in China include CATL (EV battery and energy storage), Huayu (seats, large interior, and exterior parts, clusters, central consoles, moldings), Joyson Electronics (seat belt, airbag, steering wheel, sensors), Huada Automotive (auto body stampings), Wuhu Token Sciences (dashboard), Sanhua Intelligent (HVAC), Hongfa Technology (direct current relay), Guangdong Hongtu Technology (aluminum alloy support parts).
If China’s EV supply chain is able to meet Tesla’s stringent requirements on quality and cost, we believe this will help further boost the credibility of Chinese companies and persuade more global original equipment manufacturers (OEMs) to collaborate openly. With more orders, Chinese companies in the EV value chain will have opportunities to improve technology with more funding and reduce costs through economies of scale. This ultimately will elevate the entire EV supply chain in China and represents a win-win situation for the Chinese government, EV suppliers, and OEMs.
Already EVs -- with Tesla (as of now) well ahead of its peers globally and tenaciously holding the top spot in China for the moment -- are deemed the preferred vehicle of the next generation. They are championed by ESG investors and governments that welcome non-polluting technology and self-imposed regulations to limit non-disposable or non-renewable products. This also stands them in good stead with other investors and the public in general. As the environmental impact and liability issues become greater concerns worldwide, many drivers and companies see the switch to EVs as only a matter of time, and with Tesla’s dominance not guaranteed in China, local firms are likely to have more of a market share at home soon, if not elsewhere as well.
Staying Ahead with Mirae Asset’s Latest Insights
Disclaimer & Information for Investors
No distribution, solicitation or advice: This document is provided for information and illustrative purposes and is intended for your use only. It is not a solicitation, offer or recommendation to buy or sell any security or other financial instrument. The information contained in this document has been provided as a general market commentary only and does not constitute any form of regulated financial advice, legal, tax or other regulated service.
The views and information discussed or referred in this document are as of the date of publication. Certain of the statements contained in this document are statements of future expectations and other forward-looking statements. Views, opinions and estimates may change without notice and are based on a number of assumptions which may or may not eventuate or prove to be accurate. Actual results, performance or events may differ materially from those in such statements. In addition, the opinions expressed may differ from those of other Mirae Asset Global Investments’ investment professionals.
Investment involves risk: Past performance is not indicative of future performance. It cannot be guaranteed that the performance of the Fund will generate a return and there may be circumstances where no return is generated or the amount invested is lost. It may not be suitable for persons unfamiliar with the underlying securities or who are unwilling or unable to bear the risk of loss and ownership of such investment. Before making any investment decision, investors should read the Prospectus for details and the risk factors. Investors should ensure they fully understand the risks associated with the Fund and should also consider their own investment objective and risk tolerance level. Investors are advised to seek independent professional advice before making any investment.
Sources: Information and opinions presented in this document have been obtained or derived from sources which in the opinion of Mirae Asset Global Investments (“MAGI”) are reliable, but we make no representation as to their accuracy or completeness. We accept no liability for a loss arising from the use of this document.
Products, services and information may not be available in your jurisdiction and may be offered by affiliates, subsidiaries and/or distributors of MAGI as stipulated by local laws and regulations. Please consult with your professional adviser for further information on the availability of products and services within your jurisdiction. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.
Information for EU investors pursuant to Regulation (EU) 2019/1156: This document is a marketing communication and is intended for Professional Investors only. A Prospectus is available for the Mirae Asset Global Discovery Fund (the “Company”) a société d'investissement à capital variable (SICAV) domiciled in Luxembourg structured as an umbrella with a number of sub-funds. Key Investor Information Documents (“KIIDs”) are available for each share class of each of the sub-funds of the Company.
The Company’s Prospectus and the KIIDs can be obtained from www.am.miraeasset.eu/fund-literature . The Prospectus is available in English, French, German, and Danish, while the KIIDs are available in one of the official languages of each of the EU Member States into which each sub-fund has been notified for marketing under the Directive 2009/65/EC (the “UCITS Directive”). Please refer to the Prospectus and the KIID before making any final investment decisions.
A summary of investor rights is available in English from www.am.miraeasset.eu/investor-rights-summary/.
The sub-funds of the Company are currently notified for marketing into a number of EU Member States under the UCITS Directive. FundRock Management Company can terminate such notifications for any share class and/or sub-fund of the Company at any time using the process contained in Article 93a of the UCITS Directive.
Hong Kong: It is intended is for Hong Kong investors. Before making any investment decision to invest in the Fund, Investors should read the Fund’s Prospectus and the information for Hong Kong investors (of applicable) of the Fund for details and the risk factors. The individual and Mirae Asset Global Investments (Hong Kong) Limited may hold the individual securities mentioned. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.
Singapore: It is not intended for general public distribution. The investment is designed for Institutional investors and/or Accredited Investors as defined under the Securities and Futures Act of Singapore. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Monetary Authority of Singapore. Please consult with your professional adviser for further information on the availability of products and services within your jurisdiction.
Australia: The information contained in this document is provided by Mirae Asset Global Investments (HK) Limited (“MAGIHK”), which is exempted from the requirement to hold an Australian financial services license under the Corporations Act 2001 (Cth) (Corporations Act) pursuant to ASIC Class Order 03/1103 (Class Order) in respect of the financial services it provides to wholesale clients (as defined in the Corporations Act) in Australia. MAGIHK is regulated by the Securities and Futures Commission of Hong Kong under Hong Kong laws, which differ from Australian laws. Pursuant to the Class Order, this document and any information regarding MAGIHK and its products is strictly provided to and intended for Australian wholesale clients only. The contents of this document is prepared by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Australian Investments & Securities Commission.
Swiss investors: This document is intended for Professional Investors only. This is an advertising document. The Swiss Representative is 1741 Fund Solutions AG, Burggraben 16, CH-9000 St. Gallen. The Swiss Paying Agent is Tellco AG, Bahnhofstrasse 4, CH-6431 Schwyz. The Prospectus and the Supplements of the Funds, the KIIDs, the Memorandum and Articles of Association as well as the annual and interim reports of the Company are available free of charge from the Swiss Representative.
UK investors: This document is intended for Professional Investors only. The Company is a Luxembourg registered UCITS, recognised in the UK under section 264 of the Financial Services and Markets Act 2000. Compensation from the UK Financial Services Compensation Scheme will not be available in respect of the Fund. The taxation position affecting UK investors is outlined in the Prospectus. This document has been approved for issue in the United Kingdom by Mirae Asset Global Investments (UK) Ltd, a company incorporated in England & Wales with registered number 06044802, and having its registered office at 4th Floor, 4-6 Royal Exchange Buildings, London EC3V 3NL, United Kingdom. Mirae Asset Global Investments (UK) Ltd. is authorised and regulated by the Financial Conduct Authority with firm reference number 467535.
Copyright 2023. All rights reserved. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of Mirae Asset Global Investments (Hong Kong) Limited.