Tesla kicks off trial production in Shanghai, surprises with Q3 profits

2 min read
In this image from Tesla's Q3 earnings update, trial production of Tesla Model 3 started ahead of schedule earlier this month at the Shanghai Gigafactory, located in the city's outskirt of the Lingang free-trade zone. (Image credit: Tesla)
Trial production of Tesla’s Model 3 started earlier this month at the Shanghai Gigafactory, located in Linggang free-trade zone in the city’s outskirts. (Image credit: Tesla)

Tesla took the markets by surprise on Wednesday with the announcement of third-quarter profits, perking the market up in after-hour trading shored by news that it has started test production in its new Shanghai facility.

Why it matters: The EV maker’s third quarter profit surprise comes in stark relief to that of its Chinese peers, many of which are struggling to stay afloat.

  • Built in just 10 months, Tesla’s first overseas production facility in the outskirts of the eastern Chinese city of Shanghai cost 65% less to build than its Model 3 production system in the US, according to the company’s Q3 earnings report.
  • The company’s share prices surged 20% to $306 in after-hour trading on Wednesday.

Detail: Tesla on Wednesday reported a quarterly profit (GAAP) of $143 million after two consecutive quarters in the red. Its profits compare with Wall Street analyst expectations of $257 million in losses, and against the backdrop of the $311 million in net profit it booked in Q3 2018⁠—its best-ever quarter⁠—in contrast to which its most recent earnings have fallen by more than half.

  • Revenues from its automotive business were $5.35 billion in the third quarter, down 12% compared with the same period a year ago. The US EV giant failed to deliver on an internal goal of 100,000 vehicles delivered, missing by several thousand units.
  • Tesla attributed the profits to fundamental improvements in operating efficiency, including higher fixed-cost absorption, reduced production costs, and enhanced vehicle quality. Total gross profit during the quarter ended September 30 climbed to 22.8% from 18.9% the previous quarter.
  • The company also announced that it is already producing vehicles on a trial basis at the Shanghai Gigafactory, from general assembly to body to paint. The investor update contained nine pages of photos.
  • It won approval on October 17 from the central government to manufacture automobiles in China and is now finalizing the license and other governmental requirements.
  • Continued volume growth and cost controls will be important for “achieving sustained, industry-leading profitability,” said the company in the earnings update. Tesla CEO Elon Musk confirmed in the earnings call that it will expand the new Shanghai factory into battery and module production.

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Context: The Chinese government has laid out aggressive EV sales targets for 2025 and has offered ample help for Tesla to establish its manufacturing facilities in the world biggest EV market.

  • Musk expressed his appreciation to the Chinese government publicly at the government-led World Artificial Intelligence Conference in Shanghai in late August.
  • “Look how much progress you can make in China. This is extremely impressive,” the Tesla founder said, expressing his gratitude for the “China speed” achievable with strong government support.