While other tech giants are preparing for a recession-induced business slowdown, Tesla has no shortage of demand for its electric cars; rather, CEO Elon Musk says, the company has a production problem to fulfill its massive backlog of orders, some of which have a wait time longer than 12 months.
At the center of Tesla’s production challenge at the moment is its Gigafactory in Shanghai, China, which, in a normal year, manufactures nearly half of Tesla’s global orders. That powerhouse has faced unprecedented disruptions in recent weeks as a result of China’s stringent Covid-19 lockdown measures.
In April, Giga Shanghai produced just over 10,000 electric vehicles, 81 percent down from the previous month, according to data from the China Passenger Car Association. The plant was closed for 18 days in April to comply with local lockdown orders and was only able to partially operate for the remaining 12 days.
Musk is quite optimistic about getting Giga Shanghai back up and running in full speed soon. In an interview with the Financial Times on May 10, the Tesla CEO said he’d had some conversations with the Chinese government in recent days and concluded that “it’s clear the lockdowns are being lifted rapidly, so I would not expect this to be a significant issue in the coming weeks.”
Will China lift its lockdowns?
The reality, however, may not be as rosy as he thinks. Although Shanghai has reported fewer new Covid cases lately, there is no sign of lockdowns being relaxed. In fact, in many areas of the city, authorities have tightened quarantine measures after Chinese President Xi Jinping doubled down on his controversial “zero-Covid” policy, declaring on national TV last week that anyone who doubts the approach is the enemy of the Chinese Communist Party.
Across Shanghai and its neighboring cities, the vast majority of offices and factories are still shut. Most ports and highways are closed, effectively cutting off logistics—an essential part of a carmaker’s supply chain. Tesla was one of the roughly 600 companies deemed important enough to reopen first. But many of its suppliers are still under lockdown, leaving the company no place to procure raw material and parts.
Tesla was able to operate using parts in inventory for most of April, churning out about 1,000 cars a day. The company had aimed to ramp up output to 2,600 cars a day as soon as next week. But as of this week, daily output has dropped to less than 200, Reuters reported, citing an internal memo.
How low will Tesla stock sink?
It’s estimated more than 30 cities in China were under various degrees of lockdown for all of April, causing a crash in passenger car sales. Tesla’s China sales, which accounted for a quarter of its global business in 2021, dove 98 percent in April from the previous month. It’s not an immediate concern for the company, since it has plenty of back orders to fulfill. However, if lockdown across China continues into the summer, it could eventually put a dent in Tesla’s second-quarter and third-quarter financial results.
Tesla’s share price has already plummeted 30 percent in the past month, largely due to a market-wide selloff. Many investors, including Bill Gates, believe it could fall further. Gates has a $500 million short position on Tesla stock, he confirmed last month.
If Tesla stock falls below a certain level, it could jeopardize Musk’s plan to acquire Twitter. Under his financing plan for the $44 billion deal, he will sell about $21 billion worth of Tesla shares (he has already sold $8.5 billion) and borrow the rest against Tesla shares as collateral.