Tesla shares decline due to production cuts in China as the delivery date approaches

Tesla (TSLA) has reportedly reduced production at its Shanghai factory amid slowing demand for electric vehicles in the world's largest auto market. The move to cut production in China also comes as the global electric car giant heads toward a potential first-quarter delivery failure and has announced that car prices will start rising. Tesla stock fell early Friday.

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Tesla is cutting production at its China factory to five days a week from 6.5 days, Bloomberg reported, citing sources. Bloomberg reported on Friday that the production cuts began earlier in March and could continue into April.

The move comes amid slowing electric vehicle growth in China and with Tesla's Shanghai facility not already producing at full capacity. Tesla watchers have repeatedly said in recent weeks that global inventory appears high.

Earlier this week, local media reported that Tesla would slightly raise Chinese list prices on Model Y vehicles starting April 1, following similar plans in the United States and Europe. Tesla is also offering discounts of $1,000 to $1,500 in China on inventory of Model Y vehicles. Inventory discounts are more significant in the US and Europe.

Raising prices could dampen future demand, especially in China, while competitors are rolling out new or updated models at a rapid pace, usually at aggressive prices.

First quarter deliveries fell short of expectations

The global electric car company ended 2023 on a high in China. However, the dynamic of electric cars in China changed in early 2024. Tesla CEO Elon Musk also said that Chinese electric car companies are Tesla's main competition – with BYD (BDDF), New (New), Lee Otto (for me) and others are all making inroads in the electric vehicle market.

Tesla China delivered 60,365 vehicles in February, down about 19% compared to last year, according to the China Passenger Car Association (CPCA). Chinese New Year lasts for two weeks in February, from February 10 to February. 24. Total Tesla deliveries of vehicles made in China in January and February were 131,812, down 6% compared to 2023.

On Thursday, Li Auto lowered its first-quarter delivery forecast, implying that March sales represent roughly half of what the Chinese electric car maker expected on March 1.

A production cut in Shanghai would further confirm weak demand, not only in China, but also in Europe and other major markets. Shanghai's exports to Europe have dwindled over the past few months, while Tesla's Berlin factory is operating well below capacity.

Meanwhile, with the first quarter ending soon, Tesla appears headed toward a delivery failure. The Wall Street consensus still currently includes first-quarter deliveries of 481,000 units, according to FactSet, but several analysts have lowered expectations in recent days. Tesla is expected to announce first-quarter deliveries in early April.

Tesla stock performance

TSLA shares fell 3.3% to 167.14 during Friday's market action. Tesla stock fell 1.6% to 172.82 on Thursday. Tesla is looking for its first weekly advance in three weeks.

Last week, Tesla stock fell 6.7% to 163.57, hitting new lows for 2024 and levels not seen since May 2023. TSLA stock fell more than 14% in March, and is the S&P 500's biggest loser so far in 2024.

UBS last week cut Tesla's stock price target to 165, from 225, and maintained a neutral rating on the stock. UBS cut its first-quarter delivery forecast to 432,000 units, from its previous forecast of 466,000. The company also cut full-year deliveries to 1.96 million units, from 2.02 million previously.

With 2023 in the rearview mirror, the analyst consensus now points to Tesla's 2024 earnings being below the 2023 level. That signals another year of declining earnings for this growth stock. Wall Street expects Tesla to have earnings of just $2.96 per share in 2024, according to FactSet. That would be a decline of about 5% versus $3.12 a year ago.

Morgan Stanley Tesla bull Adam Jonas recently issued an investment note in which he cut Tesla's 2024 earnings forecast by 25%, saying the electric car giant could “likely” lose money this year.

Jonas cut his Tesla stock price target to 320, down from 345, but maintained an overweight rating on the stock. Jonas also cut his Tesla 2024 EPS forecast to $1.51. Its previous view was $2.04 per share. The analyst believes that gross profit margins for cars will decline to 11.4% amid continued demand problems for electric vehicles.

The electric vehicle giant ranks eighth in the 35-member IBD Automotive Manufacturers Industry Group. The stock has a 30 composite rating out of the best possible 99 ratings. Tesla stock also has a 10 Relative Strength Rating and a 68 EPS Rating.

Please follow Kit Norton on X, formerly known as Twitter, @kitnorton For more coverage.

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