July 12, 2018
There has been much talk around the world about President Donald Trump’s trade and tariff policies. With Tesla being a major disruptive brand in the automotive space in both countries, these policies put them in a unique position. They have made it no secret that they want to be in the massive Chinese market over the long term and help satisfy the demand from their increasingly wealthy consumers. However the new retaliatory tariffs from China have caused Tesla to raise prices across the board. For example, a basic Model S now costs about $20,000 more.
Making matters worse for the company is that they currently manufacture exclusively in the US, which is preventing them from shifting production elsewhere and avoid tariffs. Compounding issues further is the fact that China is already a large producer of EVs, which makes them more than capable enough to support strong domestic demand. So while Tesla has been driving EV penetration in countries like the US, the fight for market share isn’t as easy in China. As such, any roadblocks that tilt the playing field away from them could have long term implications for the company.
While the Wall Street Journal, The Hustle, and others have done a great job reporting on the issue for the company, we wanted to take a second as analysts to think through potential issues and whether this is a real problem for Tesla.
Given the genius branding carried out by Elon Musk and his team at Tesla, the company’s cars have become an aspirational brand around the world. Tesla owners are envied, and consumers that can afford it often want to buy the car to own something that’s unique on the road. This is especially true in Asia and specifically China, where affluent consumers love purchasing products and status symbols from western brands. As such, we believe the tariff related drop in sales won’t be too big of a deal.
Furthermore it should be noted that currently all of Tesla’s models are into the luxury category in terms of pricing. In this category, consumers aren’t as sensitive to price as one would normally expect, which further insulates the company from falling sales due to tariffs.
Finally, we’ll mention one personal anecdote: During our travels to India, we routinely see consumers buying Honda City models (equivalent to a Civic in the US), despite its price tag being 50+% more than in the US because of tariffs. In that culture, owning a foreign car makes you the talk of the town, and shows your peers that you have made it. And the same goes for BMW’s, and Mercedes’. This reinforces our belief that affluent consumers might not like paying more for the same product, but they will do it when they enjoy it and believe in the quality, and status symbol it represents.
Harley Davidson recently announced that they would be shifting production to Europe to help insulate consumers from tariffs. Tesla has had ambitions of beginning production of batteries and vehicles in China, and recently inked a deal to do so within the next couple of years. While this won’t help Tesla in the short term, if the tariffs and trade wars were to become a longer term phenomenon, it could help the company avoid any issues. And there’s also a possibility that the company can negotiate an exception with the Chinese government now that they’ve put their Chinese manufacturing plans into motion.
However, there is one potential issue with these plans. President Trump’s affinity for tweeting about individual companies’ manufacturing plans are certainly well documented at this point. Sticking with the Harley Davidson example, the company took a lot of heat after they made their European announcement. So despite the fact that Tesla’s Chinese ambitions were well documented before the tariff issues, there’s the possibility of the President tweeting out negative headlines about Tesla moving jobs offshore to help the Chinese.
The Bottom Line
Long story short, we believe this is going to end up being much ado about nothing. Tariffs and trade wars are not something we believe in, and we certainly hope the issues get resolved sooner rather than later. But until Tesla becomes more of an accessible, mass-market brand, or they lose their sex-appeal to consumers, in our opinion price hikes and tariffs will not have a major effect on sales for the company.