Elon Musk’s Tesla factory in China just got up and running. Now its vehicle production there will be delayed because of the deadly Wuhan virus outbreak.
Beijing has taken extraordinary measures to try and contain the outbreak, including placing major cities on lockdown and extending the Lunar New Year holiday. Officials in Shanghai, where Tesla’s China factory is located, extended the holiday period from January 30 to February 9.
“At this point, we’re expecting a 1 to 1½ week delay in the ramp (up) of Shanghai-built Model 3 due to a government-required factory shutdown,” Tesla’s chief financial officer Zachary Kirkhorn said during an earnings call Wednesday.
Kirkhorn said the hit to Tesla earnings will be limited because profits from the China-made cars are still in the early stages. He added that the company is also keeping an eye on whether there will be supply chain disruptions for Tesla’s California-made cars.
The company on Wednesday posted it first annual profit, topping Wall Street’s forecasts. Shares in Tesla (TSLA) jumped 11% in after hours trading in New York.
The coronavirus has killed 170 people so far and sickened more than 7,000 people across China, with dozens more cases confirmed in countries such as the United States, Germany and Japan.
Tesla is among a growing number of businesses feeling the effects of the coronavirus outbreak. Fellow car makers Toyota (TM) and Geely (GELYF) — which owns Volvo (VOLAF) — said their factories across China will remain closed through February 9 to comply with the extended holiday.
Restaurants such as McDonald’s (MCD), Starbucks (SBUX) and Yum China-owned KFC and Pizza Hut have closed thousands of stores across the country. Major airlines including British Airways, American Airlines (AAL) and United (UAL) have decreased flights to and from mainland China, or suspended them altogether. Disney (DIS) shuttered its parks in Shanghai and Hong Kong, as museums and major attractions including the Forbidden City remain closed.
Tesla’s ambitious China strategy
Tesla’s factory shutdown comes just weeks after the company began delivering its first Shanghai-made Model 3 cars to the public in China, an important step in Musk’s bold strategy to pick up a big slice of the world’s biggest car market.
Speaking at a ceremony to mark the first deliveries earlier this month, Musk announced that Tesla will also make the Model Y, its lower-priced SUV, at its new Shanghai factory. It also plans to open a design center in China with the aim of creating an “original car” for sale in markets around the world.
Wedbush analyst Dan Ives said the delay in China-made Model 3 cars “is a containable near term risk,” given the Shanghai factory is just starting to ramp production.
“We do not believe the coronavirus will have a longer term overhang for Musk (and Tesla) in this key region with China, the fuel on the growth engine,” he said. Ives has a buy rating on Tesla stock with a bull case valuation of $900. Shares in Tesla closed at $581 in New York on Wednesday.
Musk remains bullish on China, saying during Wednesday’s earnings call that Tesla has seen a “pretty big fundamental efficiency gain” by making affordable Model 3 cars “on the continent where the customers are.”
Earlier this month, Tesla slashed the starting price of its Shanghai-made Model 3 sedan to 323,800 Chinese yuan ($46,680) from 355,800 yuan ($51,290). With government subsidies, the cost could drop to as low as 299,050 yuan ($43,110).
“We were trying to make the cars as affordable as possible as fast as possible (…) while still being at least a little bit profitable and grow a company like crazy,” Musk said on Wednesday.
– Laura He contributed to this report.
