Tech

Tesla's Shanghai Gigafactory will bolster profit margins, Morgan Stanley says

Key Points
  • The Gigafactory 3 is Tesla's first outside the U.S., and CEO Elon Musk has hailed it as key to the future of the company, as demand for Tesla vehicles increases in China.
  • The factory is expected to reduce labor costs to as low as one-tenth what the electric car manufacturer currently pays in wages at its California factory.
  • The research predicts that Tesla will fail to capture a large share of the Chinese electric vehicle market but that lower production costs will help the company achieve profitability.
Workers walk outside the Tesla Inc. Gigafactory in Shanghai, China, on Friday, Nov. 1, 2019.
Qilai Shen | Bloomberg | Getty Images

As Tesla's Shanghai Gigafactory kicks into production, investors are warming to the potentially massive profit margins it could yield.

The Gigafactory 3 is Tesla's first outside the U.S., and CEO Elon Musk has hailed it as key to the future of the company, as demand for Tesla vehicles increases in China.

The factory is expected to reduce labor costs to as low as one-tenth what the electric car manufacturer currently pays in wages at its California factory, which Tesla says employs more than 10,000 workers. With such a reduction in costs, Tesla could sell its vehicles at a profit margin in the low- to mid-30% range, comparable to that of luxury auto manufacturer Porsche, according to research from Morgan Stanley.

"While most investors we speak with expect China to be a success for Tesla from a demand point of view, we have found that the part of the story that is still, in our opinion, widely underappreciated is just how profitable Tesla cars in China could be in a localized, mass scale, lower cost structure environment," Morgan Stanley analysts wrote.

Tesla orders in China spiked last quarter after Beijing gave dozens of electric vehicle makers there a healthy tax break. The "purchase tax" exemption lowers the cost of buying a Tesla in China by around 99,000 yuan, or $14,000. The research predicts that Tesla will fail to capture a large share of the Chinese electric vehicle market, but that lower production costs will help the company achieve profitability.

"We are of the opinion that the new Shanghai Gigafactory has the potential to show how inefficient Tesla's current production assets are relative to competitors and see scope for the Shanghai Gigafactory to be one of the more profitable auto factories in the world," the analysts wrote.

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