Tesla Stock: China Exposure Faces New Risks (NASDAQ:TSLA)

On Tuesday afternoon U.S. time, shortly after Nancy Pelosi landed in Taipei, news hit the wires that CATL – the Chinese company that’s the world’s largest maker of battery cells – has put its planned North American battery factory on hold:

China’s CATL delays American plant as Pelosi visits Taiwan | Autoblog

This factory was supposed to supply both Ford (F) and Tesla (NASDAQ:TSLA). CATL already was one of Tesla’s main battery cell suppliers, alongside Panasonic. With the news being so fresh in the news column, the only thing that can be said about the impact on Tesla from this CATL change of plan is that anything is possible.

It will likely take another 4-8 quarters before we would even begin to see any impact on Tesla from CATL changing its plans. With that in mind, it’s as important as ever to view the impact that China has already had on Tesla’s overall global EV and BEV market shares.

Let’s begin by re-establishing the definition of EV (electric vehicle) and BEV (battery-electric vehicle). EV = BEV + PHEV (plug-in hybrid). So as to satisfy everyone’s preferences, I’m providing Tesla’s market share numbers for both relevant definitions: EV and BEV.

Global	EV total	BEV total	Tesla	EV %	BEV %
3Q 2020	834,075	562,551	139,300	17%	25%
4Q 2020	1,327,374	926,000	180,570	14%	20%
1Q 2021	1,122,476	726,250	184,800	16%	25%
2Q 2021	1,418,005	964,974	201,250	14%	21%
3Q 2021	1,682,803	1,195,554	241,300	14%	20%
4Q 2021	2,218,725	1,630,404	308,600	14%	19%
1Q 2022	1,996,276	1,404,809	310,048	16%	22%
2Q 2022	2,155,919	1,421,275	254,695	12%	18%

Click to enlarge

Data Source: Record EV Sales Month Globally! 12% Share For BEVs!

As you can see in the table above, Tesla’s global market shares in both the EV and BEV categories have been in slight decline over the last two years. It was so slight that it effectively rounded to zero, if you averaged out 2-3-4 quarters on a rolling basis.

Yet, what also stands out is the noticeable drop in the most recent quarter, which may have been a single-quarter outlier phenomenon – to be verified by the first week of November, when we obtain full Q3 data from all sources. On the one hand, we all know where that came from: The production stop in China.

On the other hand, this production stop was not specific to Tesla. Other automakers also operate in China, and there have been other production problems – not C-19 lockdowns – to varying degrees in many geographies around the world in 2022. Almost all automakers are operating dramatically below capacity as a result of semiconductor shortages and other issues.

Still, the net of it all was that Tesla’s global EV market share dropped to 12% in Q2 2022 and the BEV equivalent to 18%. Those were Tesla’s lowest market share numbers in eight quarters.

Keep in mind that this happened despite Tesla’s factories in Germany and Texas having recently opened. All other things equal, those ought to have boosted Tesla’s sales and market shares in Q2.

Will China be a plus or a minus for Tesla?

Morgan Stanley published a report after the market closed on Aug. 2, 2022, where it estimated what we already had assumed: Over 30% of Tesla’s revenue is derived from China, and nearly 50% of its profitability.

We already saw what CATL did within hours of Nancy Pelosi landing in Taipei. I have no special insight into China’s plans to retaliate or whether those plans will impact Tesla beyond what CATL has already announced. The only thing that should be clear to all investors is this: The risk profile for Tesla is higher today than it was just a few short days ago. Any decision by China’s government could be as devastating as it would be arbitrary. It could happen as unpredictably as a pet crocodile roaming around in your pants: One moment it looks so cute, and the next second it bites.

Elon Musk has lavished praise on China ever since the negotiations about building a factory in Shanghai started, several years ago. In the context of any increased tensions in the triangular drama between China, Taiwan and the US, will Musk be asked to pick sides? SpaceX is a major US government contractor. Will the US federal government or US Congress investigate if there are any sensitivities to worry about with this exposure?

Otherwise, more specific to Tesla, here are some risks with China:

• China could shut down Tesla’s Shanghai factory.

• China could shut down suppliers to Tesla’s Shanghai factory.

• China could cause a work stoppage in Tesla’s Shanghai factory.

• China could disrupt shipments into, or out from, Tesla’s Shanghai factory.

• China could find some reason to ban Tesla’s sales in China.

• China could otherwise discriminate against Tesla in China.

Basically, if the Chinese government wants to inflict pain on the US, and use Tesla as a high-profile target, it could flip such a switch with ease, in any of several ways.

Unknown known risks

As an investor, you have to assess risks as they appear and as they disappear. It would be hard to argue that a plethora of China-related risks are as low today as they were only a couple of days ago.

What’s the upside to Tesla if China does nothing to Tesla as a result of what just transpired in Taiwan? Possibly very little. On the other hand, what would be the downside? A multi-year setback, half of profits, 30% or more of sales, a deep cut into the balance sheet.

That does not appear to be a prudent risk/reward at this moment. Maybe wait until the Taiwan crisis hopefully resolves itself without incident.