King Lion vs Wolf Pack, Can Tesla Win its "Turf War"?

Removing the AI filter and focusing solely on the car manufacturing business, Tesla's "presence" in the United States still remains within the framework of the manufacturing industry. In this business with relatively low barriers, Tesla's core advantages vary in different regions, but they all share the advantages of being an early mover and having a large scale.

In the previous article, Dolphin Research focused on a core question in Tesla: How Far is Musk's "Trillion Dollar Empire Dream"?: Does the United States have a chance to increase its penetration rate from single digits to 25-30% within a year? Unfortunately, the answer is no. So next, let's take a look at how much market share Tesla has left in China and Europe, and see where Tesla can make its mark.

As part of this series of research, Dolphin Research will dive straight into the analysis of China and Europe, as well as the final outcome and valuation of the entire automotive business.

Let's get started!

3.2) How Much Market Share Does Tesla Have Left in China?

The rise of electric vehicles in China can be attributed to the "halo effect" brought about by Tesla, which has led to a collective rise in the entire new energy vehicle industry chain and a significant increase in the supply of high-quality vehicles. Coupled with continuous policy support for new energy vehicles, the penetration rate of new energy vehicles in China has jumped from single digits in 2020 to nearly 30% in 2022.

By the end of 2022, looking at the penetration rate structure of different price segments, we can see that the entry-level segment below 80,000 RMB, represented by Hongguang MINI EV, has reached its peak penetration rate, while the mid-to-high-end segment (250,000-350,000 RMB), represented by Tesla, NIO, and Li Auto, has seen a rapid increase in penetration rate.

The price segment of 100,000-150,000 RMB still has a relatively low penetration rate, which represents the average purchasing power of most car buyers in China and the most practical region for car purchases.

However, there has been a significant change when it comes to the penetration rate in the 100,000-150,000 RMB price segment:

Prior to 2022, the increase in penetration rate of new energy vehicles was mainly driven by pure electric vehicles, but in 2023, the increase in pure electric penetration rate has slowed down significantly, leading to a slowdown in overall penetration rate.

The increase in hybrid vehicles in 2023 is still maintaining a relatively steady pace, outperforming the overall passenger vehicle market (which has been stagnant for a long time) mainly due to the boost from hybrid vehicles.

This change is also evident in individual vehicle models: whether it's the increased sales of the Zeekr C11 after the introduction of hybrid version, or the success of the extended-range version of the Li ONE, the success rate of hybrid vehicles in 2023 is significantly higher than that of new pure electric vehicles.

According to Dolphin Research, the reason behind this is quite easy to understand: for people in this price range, a car costing around 100,000 yuan is usually the only car in the family, used for both short and long trips. Therefore, the range needs to be reliable, the space cannot be too small, and the car should remain in good condition after prolonged use without various minor issues. Moreover, the convenience of charging (charging stations and charging speed, etc.) is also a consideration when switching to pure electric vehicles.

For example, popular fuel models in this price range, such as the Volkswagen Lavida, Nissan Sylphy, and Toyota Corolla, all have obvious features such as fuel efficiency and worry-free after-sales service for long-term use.

However, in the pure electric vehicle market, there is currently no particularly high-quality supply in this price range. For example, BYD's Dolphin Research, priced between 116,800 and 136,800 yuan, falls short in terms of size. The BYD Qin PLUS EV falls within this price range, but its theoretical range of 400 kilometers and charging convenience still have room for improvement.

To further increase the market share of pure electric vehicles, there needs to be intense competition among pure electric vehicles in the 100,000 to 150,000 yuan price range, along with a sufficient number of charging stations and widespread adoption of fast charging, in order to achieve a higher penetration rate of pure electric vehicles.

Looking at Tesla, the cheapest model in its current product line, the Model 3, is priced at around 250,000 yuan. There is currently no product in the 150,000 yuan price range. Based on the current vehicle planning, it may not be until 2025 that the market sees a 150,000 yuan pure electric vehicle, as it requires a joint effort to reduce costs through materials and technology.

In terms of existing models, Tesla's overall market share in the price range corresponding to its current product prices is approximately 35%, indicating that the high penetration rate stage has already passed and the growth rate has significantly slowed down.

To achieve significantly higher sales levels than the market in the 200,000 to 400,000 yuan price range in 2023, Tesla needs to either reduce costs while improving product performance or lower the prices of existing models. In these two options:

The price reduction strategy has already been used at the beginning of 2023, including a wide range of price reductions in the Chinese market, which has brought its automotive sales gross margin to below 20%. In the absence of cost reduction, it is difficult to see another significant price reduction. Any subsequent price adjustments will be based on market supply and demand, delivery time, and inventory status.

In terms of improving product performance, the main strategy currently is the facelift of the Model 3, which will be launched in China first. The key changes include increased size, longer range, and higher price.

As an updated model that reduces costs without compromising product performance, the Model 3 does not have market expectations for a price reduction. On the contrary, Tesla's explanation is that "price increases for new models are a common market practice."

Dolphin Research estimates that they are quite confident in the updated model, believing that the demand is strong, and they are testing the market with higher pricing. If the demand is not as expected, there is a high probability of a price reduction.

Summary: In the current Chinese market, before further cost reduction in electric vehicles, the focus has shifted to hybrid vehicles, and pure electric vehicles are in a state of intermittent stock competition.

For Tesla, which only produces pure electric vehicles, it is more difficult to monetize the existing Tesla owners (DAU) in China, so sales volume remains the top priority. However, in this regard, within a 1-2 year timeframe and before the release of the 150,000 Tesla vehicles:

a) Tesla does not have any killer-level new models to release in the short term. With the improvement of production efficiency at the Shanghai factory, the gross profit margin has basically reached its limit. The path of relying solely on gross profit margin advantages to reduce prices has been exhausted.

b) In order to gain market share in the pure electric vehicle market with a focus on stock competition, Tesla needs to focus on reducing costs through technology and improving product competitiveness. The key lies in the strategy and progress of the Model 3 and Model Y updates in terms of sales volume versus gross profit margin.

However, overall, Tesla's room for maneuver in the Chinese automotive market is relatively limited in the next 1-2 years.

3.3) Europe: Less pressure, but opportunities still exist

As the earliest market to promote new energy vehicles, Europe has a total car sales volume of 12 million vehicles, which is approximately half of China's. However, the penetration rate of new energy vehicles in Europe is already similar to that of China, reaching over 20%.

The reasons behind this are twofold. First, Europe has the strictest emission reduction policies behind its energy transition, which forces European car manufacturers to transform and heavily subsidize new energy vehicles. Second, in the past few years, European subsidies have not been as restrictive as those in the United States. As long as a vehicle meets the requirements for carbon emissions or range, and can be charged, it is eligible for subsidies.

However, after achieving a high penetration rate, most European countries are phasing out subsidies and starting to engage in trade protectionism. For example, recent news reports suggest that anti-dumping investigations have been launched against Chinese automakers.

Furthermore, behind the subsidies in Europe, there is another issue: the focus is on energy transition rather than building industrial chain capabilities. Among the popular new energy vehicles in Europe, apart from the Volkswagen ID series, there are many vehicles that have undergone oil-to-electric conversions or have low range. These vehicles do not have strong product competitiveness.

This has also led to a decline in penetration rate after the reduction of subsidies, unlike in China where the penetration rate continues to rise. When the sales of new energy vehicles in Europe transitioned from policy-driven to market-driven, the transition was not smooth.

Therefore, unlike the logic of market share improvement and industry supply recovery from the shortage of automotive semiconductor regulations in the United States, the growth driver in the European market this year mainly comes from the overall recovery of the industry level under the semiconductor supply response, gradually restoring annual car sales to around 15 million units before the pandemic.

The opportunity for overall market share improvement in new energy vehicles has passed. This year, there are still certain opportunities mainly in some structural areas. For example, in countries in Western Europe where there are few continuing new energy subsidies, France has increased subsidies for car buyers and car manufacturers, leading to a 40% YoY increase in electric vehicle sales in the first seven months of the year.

In Southern European countries, although Spain and Italy have slightly weaker purchasing power, their penetration rates are low, and subsidy policies have not only continued but also increased. Spain saw a 47% YoY increase in the first seven months, the highest in Europe.

In most other countries, what is needed is the infrastructure for charging new energy vehicles. Taking the UK as an example, its policy has shifted towards encouraging the construction of charging stations. After the infrastructure was established, new energy vehicle sales did not significantly decline due to the withdrawal of subsidies, with an increase of over 30% in the first seven months.

Looking ahead, if Tesla wants to increase sales in Europe, it may still rely on cheaper Tesla models, as European consumers prefer small and compact cars as well as compact SUVs.

It can be seen that in 2022, approximately 4.08 million units, accounting for about 81% of car sales, were B-segment (small) and C-segment (compact) cars. In the SUV segment, approximately 4.43 million units, accounting for about 76% of total SUV sales, were B-segment and C-segment models. The market for mid-size and large sedans and SUVs is relatively small, which may be related to the flat terrain and narrow urban roads in Europe, as well as the consumer culture in Europe that emphasizes economic practicality when buying cars.

Summary: Based on the analysis of the markets in the United States, China, and Europe, and taking a long-term perspective, Tesla, as the first mover, has the following advantages:

Compared to its counterparts in the United States, it has obvious advantages in terms of early entry, technology, and production capacity.

In China, where electrification is a relatively weak barrier, the technological advantage gap is already small. However, Tesla's real relative advantage lies in its cross-market advantage. It naturally has a "juicy" U.S. market, while the U.S. market is essentially "closed" to Chinese players. Tesla's localization layout in Europe preceded that of its Chinese counterparts. Even if there are subsequent anti-dumping measures in Europe, it will mainly involve replacing Chinese production capacity with European production capacity to supply the European market.

In the European market, Tesla still has a clear technological advantage based on its pursuit and insistence on product excellence.

However, from a medium and short-term perspective,

Tesla's supply-side revolutionary vehicle supply (the launch of the next-generation car platform with an annual production capacity plan of 5 million vehicles, which may occur in the second half of 2024) and the consideration of long-term supply chain establishment or gradual withdrawal of subsidies worldwide will result in a "flat period" for its sales in the next two years, with little room for surprises.

In terms of operational space, apart from the significant price reduction implemented at the beginning of the year, the remaining adjustments are only minor price adjustments and the redesign of Model 3 and Model Y. The goal is to continuously strike a balance between market share (targeting a 50% compound annual growth rate in sales) and gross profit margin.

IV. Speculation on the Endgame of Tesla's Car Sales

Lei Jun, the CEO of Xiaomi, once made a judgment that in the era of electric vehicles, the market concentration of the top five global brands in terms of electric vehicle sales would reach 80%. Here, Dolphin Research will attempt to speculate on Tesla's ultimate sales volume from an "endgame" perspective:

1) End game : Global annual sales of electric vehicles exceed 70 million

Currently, the global automobile sales volume is basically stable between 85 million and 95 million units. Among the national markets, Norway has the highest electric vehicle penetration rate at 90%. Assuming a stable electric vehicle penetration rate of 80% globally, the ultimate stable sales volume of electric vehicles would be approximately 72 million units, while the global annual sales of electric vehicles in 2022 were just over 10 million units.

2) The top five global electric vehicle market share averages 9.5%, with Tesla selling 9 million vehicles annually

However, Dolphin Research observes that in the case of smartphones, which are highly globalized in terms of the industrial chain and can be produced in one location and supplied globally, the market share of the top five global players is basically around 70% in a mature market with a stable structure.

Looking at the current global automotive market competition: Currently, the top five global market shares account for about 50%, with an average market share of 10% per company. In reality, the market share of the leading company is about two percentage points higher than the average.

If we consider smartphones as the peak of market concentration in the electric vehicle market, and electric vehicles become electrified products instead of oil-driven products, standardization and competition barriers will be further lowered. Compared to the original market concentration, it will be further increased. However, as automobiles are the largest and highest-priced electrified products:

a) Transportation costs are high, making it difficult to equalize price differences through manual delivery or parallel imports (parallel imported cars).

b) The value of the industry chain is significant, contributing more to local employment than smartphones. Local and regional protectionism (support for local supply chains, high import tariffs, anti-dumping investigations, etc.) will be stronger for automobiles.

Dolphin Research estimates that the market share of the top five electric vehicle manufacturers in the endgame scenario is likely to be between 55% and 70%. Dolphin Research assumes a market share of 60% for the top five in the endgame, corresponding to an average market share of approximately 9.5% for a single electric vehicle manufacturer in the automotive market.

Based on the assumption that Tesla's market share in the endgame scenario is around 10% (positioned below current Toyota and above Volkswagen), Tesla is expected to achieve annual sales of approximately 9 million units.

However, considering that it took about 15 years for the global top five smartphone market shares to stabilize from 2010 to 2018 (excluding the trade protectionism reflected in the Huawei incident), it will likely take a similar amount of time to gradually achieve this goal.

3) Incremental growth relies on "affordable" models

Whether it is the best-selling Toyota RAV4 or Corolla, or BYD's best-selling electric vehicle models, Song and Qin, they are all priced between 80,000 and 200,000 yuan. Tesla's existing models have not yet reached this price range.

(Note: The prices in JATO statistics are the overseas market prices, which are higher than the domestic prices. When converted to Chinese yuan, they are relatively high due to the depreciation of the yuan).

Therefore, for Tesla to enter the next major business cycle, it actually needs the launch of affordable models by the end of 2024. In 2022, the annual sales of the world's best-selling model just exceeded one million units, and Tesla has prepared a production capacity of 5 million units for this model (2 million in Mexico, 1 million each in China and Europe, and possibly another 1 million in future locations). .

However, at present, it is difficult to imagine a situation where a single model can directly support half of the total sales volume, even if the strategy is based on a single popular product. From a more feasible perspective, it is possible that there are two or more models in the price range of 100,000 to 200,000 yuan with significant price differences (similar to the price difference between Model 3/Y in the range of 50,000 to 250,000 yuan) that can support an annual sales volume of 4 million units.

In this update, Dolphin Research has given it an annual sales forecast of 1.3 million units in 2027, corresponding to a total sales volume of nearly 5 million units within five years, accounting for more than half of the total sales volume.

To evaluate the commercial value of Tesla's car empire, in addition to sales volume, the long-term gross margin expectation is also important. Tesla's long-term gross margin has fluctuated from around 20% at the beginning to nearly 30% during the peak period of the Shanghai factory's production, and since 2023, it has rapidly declined to below 18% due to intensified competition in the automotive market.

Looking at the gross margin range of the automotive industry over different periods, there is a clear distinction between high-end positioning and mass-market positioning: Toyota and Porsche basically represent the gross margin champions of the two camps. Tesla's gross margin for its standalone car business is 17.5% in the absence of the "affordable car" being released. When combined with the relatively higher gross margin of car leasing and carbon credits, which generate revenue and profit, the overall gross margin of the automotive business has not reached 20%.

The company's long-term guidance for gross margin is to exceed the fuel vehicle manufacturers in the mass-market segment. In the mass-market segment, Toyota, which relies on extreme scale and similar single popular models, achieved a new high gross margin of 23% last year under the influence of supply-side constraints. Dolphin Research estimates that Tesla will surpass Toyota and rank second only to Porsche in terms of long-term gross margin.

In this scenario, Dolphin Research conducts a DCF valuation of the entire vehicle business, resulting in an estimated valuation of approximately $650 billion, with a single share value contribution of $200 for Tesla. This roughly corresponds to the valuation safety bottom of Tesla's automotive business without significant economic issues, ignoring the valuation contribution of its other business layouts and only considering the valuation of the automotive business under a neutral-to-slightly optimistic scenario (the optimistic point mainly includes incorporating the unreleased high-volume models into long-term expectations). And if this affordable model is not successful, ignoring the impact of this model, in an extremely pessimistic scenario, the valuation of Tesla's overall vehicle business is $400 billion, corresponding to a per-share value of $130. However, this price level is basically the absolute low point for investing in Tesla, as it completely ignores the value of Tesla's energy, car service, and AI, and makes an extremely pessimistic judgment on Tesla's automotive business. Dolphin Research estimates that the valuation range of the overall vehicle business is not much different from the range under DCF. This is a rough estimate by Dolphin Research, for reference only.

In Sum: Ripping Off AI filter, new car cycle is the real driver.

From the above analysis of Tesla's overall vehicle business, it can be seen that after the industry penetration rate has reached a high level, Tesla's next major growth opportunity actually comes from cost reduction through technology and new vehicle supply brought by new car platforms. The next major growth cycle should correspond to 2024-2025.

Other grand narratives surrounding Tesla, such as FSD, Robotaxi, DOJO, charging, and energy, are all behind the narrative of automotive growth. Overly advanced discussions and pricing of these narratives will instead bring the risk of chasing high prices.

In the short term, a. Tesla's factory shutdown in the third quarter due to summer, b. the price reduction and inventory clearance before and after the release of the new Model 3 in the third quarter, with limited initial volume, c. the majority of the price reduction in raw materials has already been reflected in the first half of the year, and the impact on the third quarter is minimal; d. the structural cost reduction from the Berlin and Texas factories is still in the ramp-up phase of capacity expansion, rather than the cost optimization stage after reaching full production.

All these factors combined likely mean that both sales volume and gross margin of Tesla's automotive business will deteriorate marginally, and the market's current expectations are not sufficient. It is almost certain that sales volume will decline and automotive gross margin will decline in the third quarter.

After the third quarter, the changes in volume and price of the new Model 3, as well as the extent to which they can support Tesla's gross margin, will become exceptionally important.

With this, Dolphin Research's study on Tesla's vehicle business comes to an end. Dolphin Research will further analyze its second valuation curve business this year that is driving its upward trend - FSD+AI business, as well as the company's current second business curve - energy business. Stay tuned.

For historical articles by Dolphin Research on Longbridge, please refer to:

In-depth Analysis

2023-09-19 In-depth Analysis Tesla: How Far is Musk's "Trillion Dollar Empire Dream" from Reality?

2021-06-03 In-depth Analysis Tesla (Part 2): Where Does Tesla's Story Go, Mistake or Overvaluation?

2021-05-21 In-depth Analysis 10 Years, 300 Times: How Long Can the "Enchanting" Tesla Magic Last?

Financal Reports

July 20, 2023 Earnings Report Analysis: "Trillion-dollar Tesla? Only True Fans Dare to Embrace"

July 20, 2023 Conference Call: "Tesla Minutes: Gross Margin Erosion, Tesla May Continue to Lower Prices" app_id=longbridge)》

2023年4月20日财报解读《Tesla: Big Year of Promises, Challenging Year of Execution, "Long-lasting Companionship" is Tough》

2023年4月20日财报电话会《Tesla: Confidently Selling Cars at Zero Profit, Harvesting with Autonomous Driving》

2023年1月26日财报解读《Tesla's Story Reshaped, Testing the Moment of Faith!》

2023年1月26日电话会《Tesla Minutes: "No Competitor Even with a Telescope for Autonomous Driving, the Second Tesla Might Be in China"》