Could Tesla Be Lowballing Its Estimated Demand in China?


Tesla has said that it is aiming to begin deliveries in China as early as the first quarter of 2014. And the company's recent launch of a Chinese version of its website to facilitate orders suggests that Tesla is on schedule. But what kind of demand can investors expect for Tesla's Model S in the country?

Model S

Tesla's conservative estimates
In Tesla's Q1 2013 earnings call, CEO Elon Musk said that the company expects demand for the Model S in Asia of at least 5,000 units annually. The figure is important, because it is part of the geographical mix the company used to arrive at an estimate for demand that could exceed 40,000 for the Model S globally by the end of 2014.

At least according to Tesla's second-quarter letter to shareholders, the reasoning behind the 40,000 number goes like this: 20,000 in annualized demand for Model S in North America, half that in Europe, and about 10,000 more units out of "China and the rest of Asia and other countries." Musk says this estimate sounds "pretty reasonable to me."

China, on its way to be the world's largest market for luxury cars, is the big wildcard in the equation. As large as the country is, it could be easy for Tesla to underestimate the demand for the Model S in the country.

The opportunity
Indeed, a closer look at the market and Tesla's potential there suggests that Tesla could very well be lowballing its projected demand in the country.

First and foremost, there's no reason that the Model S won't be a success in China. Not only is the Chinese market excellent for luxury cars, but also polluted air is driving a government push for electric cars. After a modification to the back seat, giving it an executive status since vehicle owners of luxury cars in China typically don't drive their own cars, the Model S looks like an excellent fit for the massive market.

Second, 5,000 simply seems extremely conservative. Tesla has guided for 21,500 Model S deliveries in 2013 (mostly in North America) -- and these deliveries are limited by supply. In Tesla's second-quarter letter to shareholders, Musk seemed to admit that the estimate may be too conservative:

But I do say, China, it's a huge market. It's the world's biggest market for premium sedans. If you take something like, say the Mercedes S class, they sell approximately half of all their worldwide production in China. Obviously if we were to ratio, have a similar ratio that would be a pretty amazing outcome for Tesla.

After getting excited, Musk seemed to go back to cover his tracks: "We are not counting on anything remotely like that. Quite the opposite," he said. Then he added, "But it could be a positive upside surprise there. You just never know."

Projecting demand for just 5,000 annualized Model S deliveries in Asia is not a reasonable estimate. More accurately, it's a reasonable minimum expectation.

Does it matter?
Either way, supply -- not demand -- will likely be the headline story in 2014, just like it was in 2013. Up until this point, demand has significantly exceeded supply. A rapid global expansion will likely keep the strain on Tesla's supply throughout the year -- even if Tesla is able to continue to ramp up production.

But looking out beyond 2014, after further production improvements, this exercise has implications. It shows that even after Telsa launches its more affordable Model E, it's likely there will be a sustainable, large market for the more expensive Model S as well.

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