Tesla shelves plan to build second assembly line at Shanghai Gigafactory amid weak demand for premium electric vehicles in China

Tesla does not expect a near-term volume increase at its Shanghai Gigafactory, which it says ‘has been running near full capacity for several months’
The company’s statement validated earlier media reports about its decision to put off building another assembly line inside that production complex

Electric & new energy vehicles

Daniel Renin Shanghai

Published: 4:30pm, 26 Jan 2023

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Tesla confirmed that there are no plans to increase capacity at its Shanghai Gigafactory, as the US carmaker grapples with weakening demand in the world’s largest electric vehicle (EV) market.

“Production and delivery challenges in 2022 were largely concentrated in China,” the Texas-based EV giant said in a statement after reporting record quarterly profit for the three months ended December 31. “Since our Shanghai factory has been successfully running near full capacity for several months, we do not expect meaningful sequential volume increase in the near term.”

The statement validated media reports earlier this month about the premium electric carmaker’s decision to put off building another assembly line at its Gigafactory 3 complex in Shanghai’s Lingang free-trade zone because of a lacklustre sales outlook.

On January 13, the Post reported that Tesla put on hold plans for a second assembly line after it failed to receive approval from Chinese authorities. The new line was expected to double the Shanghai Gigafactory’s capacity to 2 million units a year.

A bird’s-eye view of Tesla’s Gigafactory 3 complex in Shanghai on June 15, 2022. Photo: Bloomberg

Tesla started drawing up plans to expand its Shanghai plant early last year amid strong domestic sales of its locally built Model 3 and Model Y EVs.

Putting the brakes on that expansion reflects Tesla’s recognition of aggressive competition from Chinese rivals and decreased demand for premium EVs in the world’s biggest car market.

Tesla’s biggest competitor is likely to be a Chinese company, chief executive Elon Musk said on a call with analysts on Thursday after the US firm reported its latest quarterly earnings, according to a Bloomberg report.

Asked about Chinese car companies, Musk said they “work the hardest, and they work the smartest”, describing them as the most competitive in the world. “If I were to guess, probably some company out of China is the most likely to be second to Tesla,” he said.

Tesla’s China sales jump on price cuts, but fierce competition clouds outlook

Faced with increased worries about shrinking wages and low job prospects across the country, Chinese car buyers have opted for cheaper EV models sold by domestic carmakers like BYD since late last year.

“Changing market conditions have caused EV makers to focus on sales and delivery, rather than production,” said Gao Shen, an independent analyst in Shanghai. “Premium EV brands may either cut prices or develop new mass-market models to maintain their market share.”

Tesla is the bellwether in the premium segment of China’s EV market, where it competes with domestic electric carmakers Nio, Xpeng and Li Auto.

Tesla rival Xpeng sparks all-out price war in China’s cutthroat EV sector

On January 6, Tesla slashed prices of its Model 3 and Model Y EVs by as much as 13.5 per cent after recording a 44 per cent month-on-month drop in deliveries last month, according to data from the China Passenger Car Association (CPCA). The across-the-board cuts followed discounts of up to 9.4 per cent initiated on October 24.

As a result, the prices of Tesla EVs in China have fallen to their lowest levels since the first vehicle rolled off its Shanghai production line in December 2019.

Sales of the top premium electric sport utility vehicles in China have plunged 27.4 per cent on a year-on-year basis, according to the CPCA.

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Tesla handed over 12,539 Model 3 sedans to customers in December, which was 24.5 per cent higher than the 10,069 units delivered in November. Still, that December figure was 58.3 per cent lower than the 30,102 units it delivered in the same month in 2021.

BYD unseated Tesla as the world’s largest EV vendor last year. The Hong Kong and Shenzhen-listed carmaker more than tripled its 2022 sales to 1.86 million units, most of them in China.

Tesla delivered about 1.31 million EVs last year. While that total was up about 40 per cent from 2021, the US carmaker failed to reach its 2022 goal of delivering more than 1.4 million units.