Tesla (TSLA)  Hits Another Speed Bump As Report Of Large Production Cut Rattles Investors

2:47 pm Monday, December 05th, 2022

Concerns about softening demand have been percolating in the background for Tesla (TSLA) over the past few months as rising interest rates and inflation take a toll on the global economy. Those concerns were ratcheted up a notch this morning after Bloomberg broke a story that the electric vehicle maker is cutting its December Model Y production by 20% at its Shanghai plant. TSLA has since refuted the story, but the stock is still trading sharply lower, signaling that investors remain uneasy about the demand situation.

The report also comes on the heels of a 5-10% price cut in October for TSLA’s Model 3 and Model Y in China, and this ominous tweet from Elon Musk on November 30: “Trend is concerning. Fed needs to cut interest rates immediately. They are massively amplifying the probability of a severe recession.”

A slowdown in demand would be especially problematic right now because TSLA has aggressively ramped up its production. Not only is the company boosting output at its recently launched Austin, Texas and Berlin, Germany facilities, but it also recently modernized and reconfigured its Shanghai plant to increase production. In fact, Shanghai churned out a record 100,290 vehicles in November, according to CPCA data, which represents a new monthly record for TSLA.

China’s strict zero-COVID policy has strained the supply chain in the automotive industry, and in other industries, putting pressure on both businesses and consumers in that country. The competitive landscape is also intensifying with NIO (NIO), XPeng (XPEV), and Li Auto (LI) gaining ground in China. Each of those stocks began the session with sizable gains, likely on reports of some Chinese cities loosening COVID restrictions, but those gains have since been wiped out.

While there seems to be plenty of smoke building around the slowing demand narrative for TSLA, there’s a couple key points to keep in mind.

The bottom line is that the demand environment has become more challenging for TSLA. During the Q3 earnings conference call, Musk admitted as much, stating that “demand is a little harder than it would otherwise be” as the Federal Reserve raises interest rates. With that said, sales are certainly not falling off a cliff, as illustrated by the 90% increase in November deliveries from TSLA’s Shanghai plant.