Industrial Securities: MIC M3 to Bring a Fatal Strike to Internal Combustion Cars

Analyst: ZHU Ming

Using the current RMB 272K price (price paid by consumers), we estimate Model 3 annual sales to be at 165K units, which is below Shanghai plant’s 200K/year production capacity. We think that MIC Model 3 (Standard Range) shall continue to correct the price. Each price cut shall open more space in the market, which will cause a fatal strike to internal combustion cars.

Provided that current subsidy level is not changed, if Model 3 wants to match the first phase production capacity beforehand, then it has to cut the price by RMB 20K to RMB 240K-250K, and then the corresponding production would be around 240K units. Later, Model 3 has an ability to reduce the price to RMB 220K–230K (price paid by consumers), and then the corresponding production would be 545K units.

The target is quantity, price is just means
From the official start of sales in October last year until now, MIC Model 3 price has been corrected 5 times. From the earliest RMB 355.8K (no subsidy) to the current RMB 272K (after subsidy), price cuts have been frequent and significant reaching the total of 24%. In December, MIC version started deliveries, which in Q1 this year reached 16K — highest in history. We believe that quantity is company’s core target, while price corrections are a means to an end.

Relying on ability to cut prices when localization clearly reduces costs
By analyzing costs of US manufactured and China manufactured Model 3, we think unit cost of US made vehicles is RMB 230K/unit, while unit cost of Chinese made vehicles is 176K/unit.

With localized production, unit costs fell by 24%, so when the sales price fell down to the current RMB 272K, Tesla could still keep its 32% gross margin. Localized production clearly cuts costs. Cost cuts are realized in material, manufacturing and labor costs.

Model 3 is positioned as luxury B-size vehicle and price cuts to deal a fatal blow to internal combustion engine cars
Model 3, positioned as luxury B-size vehicle, is a direct competition to Audi A4L, BMW3, Mercedes Benz C-Class, etc. If Tesla cuts the price to RMB 252K or RMB 222K per unit, it has a chance to deal a fatal blow through price corrections and attack luxury A-size market segment as well as market segment with B-size vehicles with average price above RMB 200K.

Fatal strike, market expansion
The price of Model 3 positioned as B-size luxury vehicle will deal a fatal blow to regular B-size and luxury A-size market.

B-size luxury vehicle market. Currently, this segment is Model 3’s habitat with around 600K vehicles, which includes Audi A4L, Mercedes Benz C-class, BMW 3 (the three models hold 430K units/year). Judging from the average price on the market, MIC Model 3 with the current RMB 272K price has a clear price advantage.

B-size NEV market. Market size is around 100K vehicles per year and has a potential to become bigger. BYD Tang PHEV, NIO ES6 and VW Passat PHEV have taken the biggest chunk (three models hold 66K units per year). MIC Model 3 with RMB 272K price has a price advantage over part of these models.

A-size luxury vehicle market. Market size is around 240K vehicles per year and has an upward trend. BMW1, Mercedes Benz A-class, Audi A3 (the three models hold around 200K units per year). Current MIC Model 3 price does not have clear competitive advantage. If the price is reduced to RMB 252K, it can compete with imported A-size luxury cars. If the price is cut to RMB 222K, then it can directly attack the entire A-size luxury vehicle market.

B-size regular vehicle market. B-size regular vehicle market with average sales price over RMB 200K holds around 1.2M vehicles. Honda Accord, VW Passat, Toyota Camry, VW Magotan have the biggest share (the 4 models hold around 800 K units per year). With the current price, there is no clear advantage. If the price is reduced to RMB 252K, then it might compete with part of high-end B-size regular cars. If the price is cut to RMB 222K, then it can directly attack B-size vehicle market with an average price above RMB 200K.

MIC Model 3 sales forecast
If MIC Model 3 sales price is RMB 272K (price paid by consumers), estimated sales at 165K/year, corresponding gross margin at 32% (with subsidies) / 27% (without subsidies);

If MIC Model 3 sales price is RMB 252K (price paid by consumers), estimated sales at 226K/year, corresponding gross margin at 27% (with subsidies)/ 21% (without subsidies);

If MIC Model 3 sales price is RMB 222K (price paid by consumers), estimated sales at 545K/year, corresponding gross margin at 18% (with subsidies, margin bottom line)/ 10%-13% (without subsidies cannot reach breakeven point)

Source: http://www.21cnev.com/html/202005/784810_1.html
Translation / edit: MoneyballR