Shanghai’s Covid Lockdown Deals A Blow To Elon Musk’s Tesla Production Goals

Tesla looks set for a year of dramatic growth amid spiking demand for its electric vehicles and the addition of two new plants in Germany and Texas. But a lengthy shutdown of its massive factory in Shanghai due to strict local rules to stem the spread of Covid-19 is scrambling its near-term outlook.

Giga Shanghai, which suspended operations from March 28 until about April 17, according to local reports, was Tesla’s top production source for the first time in 2021, making 473,078 Model 3 sedans and Y hatchbacks compared with 462,949 vehicles at the company’s Fremont, California, factory. Based on an estimated daily production rate of 2,100 vehicles in the first quarter, the Covid closure may have resulted in a production loss of about 45,000 vehicles representing at least $2 billion of revenue. Tesla hasn’t commented on the shutdown, though investors and analysts expect to hear about it on Wednesday when the automaker, led by billionaire Elon Musk, releases first-quarter results.

“All eyes” will be on the company’s “brutal production issues,” Dan Ives, an equity analyst with Wedbush, said in a research note. He estimates the company likely lost 50,000 units of production in Shanghai which is now “by far” Tesla’s most profitable facility. “Musk & Co. are in a tough spot, as there are so many variables around 2Q China production that will certainly weigh on guidance for the rest of the year and thus has been a clear overhang on the stock over the past month.”

Musk’s EV juggernaut, like all other automakers, is already having to contend with supply-chain disruptions, particularly a shortage of semiconductors, and rising prices for the raw materials that go into the batteries and other components that power its vehicles. Even if Tesla has restarted production in Shanghai this week it’s not clear whether the company has brought back 100% of its local workforce and if it’s receiving parts and components with the same speed that it did prior to the current Covid crisis. The company’s general target is to grow sales 50% annually for the foreseeable future.

Media reports say Tesla and other manufacturers are being encouraged to restart production using a “closed-loop” system in which workers essentially live at the factory and don’t return to their homes. “People will be required to sleep on the floor in a designated area and there will be other spaces allocated for showering, entertainment (both yet-to-be-completed) and catering,” Bloomberg said, citing a memo Tesla sent to employees.

The broad disruption of operations for all manufacturing in the region, including Tesla’s parts suppliers, makes it unlikely the company will be able to restart production at the previous pace anytime soon, says analyst Michael Dunne.

“For Tesla, automakers generally and industries across the board, the easier part of the equation is to get their own plants up and running and their people back to work,” said Dunne, a long-time specialist on China’s auto industry and whose San Diego-based consultancy advises clients on the EV and Asian auto markets. “The real large and hard-to-remove obstacles remain the suppliers into those plants.”

For example, China’s different jurisdictions have varying rules about who and what can travel across borders, within provinces and between provinces, Dunne said. “That will be the puzzle to work out in the coming days or weeks. I don’t think it’ll mean a stoppage, but it will be a stop-and-go situation and constant monitoring. That’s a very time- and resource-intensive process.”

The year certainly appeared to be starting out on an upswing. Tesla this month said it delivered a record 310,048 vehicles in the quarter that ended March 31, just after the Shanghai shutdown began. It also built 305,407 vehicles during the period, a notch below a best-ever 305,840 units in 2021’s fourth quarter.

The Austin-based company may report earning $2.26 per share in the year’s first quarter, excluding some items, when it releases results after the close of regular trading on Wednesday, based on consensus estimates. Revenue may reach a best-ever $17.8 billion.

Strict protocols at the Shanghai plant will likely be in place until at least May 1, “but it could change based on the local mandates,” Deutsche Bank analyst Emmanuel Rosner said in a research note.

It’s not entirely clear why Tesla hasn’t provided guidance on the Shanghai situation ahead of its results announcement. Keven Callahan, a spokesman for the Securities and Exchange Commission declined to comment on the matter, but provided details on the types of events that trigger a public company’s obligation to alert shareholders.

“In the U.S. (unlike some other countries), there is no constant, around-the-clock disclosure obligation,” said Columbia University Law School professor John Coffee. “Unless the company is buying or selling its stock, it only has to disclose material events within the SEC’s reporting frames, which can be as short as two business days for certain super-material events that must be reported on Form 8-K.”

The opening of Giga Berlin and Giga Texas in recent weeks provide Tesla with additional sources of production, though neither will be run at full capacity for months, nor will they enjoy the lower costs for labor and parts that can be had in China.

Still, Morgan Stanley equity analyst Adam Jonas said in a research note that “the market’s view of Tesla’s dependence on China for volume and profitability is changing. Longer term, we continue to encourage investors to dial back expectations of Chinese exposure in Tesla’s long-term geographic footprint.”

Tesla shares rose about 2.4% to $1,028.15 in Nasdaq trading on Tuesday.

Source: https://www.forbes.com/sites/alanohnsman/2022/04/19/shanghais-covid-lockdown-deals-a-blow-to-elon-musks-tesla-production-goals/