How Long Can Tesla Struggle to Get a Deal Done in China?

By Trey Thoelcke Updated Jan 12, 3:25AM EST · Published Feb 14, 7:15AM EST

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How Long Can Tesla Struggle to Get a Deal Done in China? — © Thinkstock

Tesla Inc. (NASDAQ: TSLA) may be the biggest-selling electric automaker in the United States, but it continues to struggle to expand its footprint in China, the world’s largest car market. The sticking point is whether Tesla will be able to open a factory there.

According to Bloomberg:

More than seven months after Tesla said it was working with Shanghai’s government to explore assembling cars, an agreement hasn’t been finalized because the two sides disagree on the ownership structure for a proposed factory, according to people with direct knowledge of the situation. China’s central government says the plant must be a joint venture with local partners, while Tesla wants to own the factory completely, the people said, asking not to be identified because the negotiations are confidential. Currently, all foreign automakers must partner with Chinese companies in order to manufacture locally.

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Tesla managed to deliver fewer than 30,000 vehicles in the fourth quarter of last year, despite assurances by founder Elon Musk that the number eventually will be in the hundreds of thousands. Management reported along with the most recent quarterly report:

In Q4, we delivered 28,425 Model S and Model X vehicles and 1,542 Model 3 vehicles, totaling 29,967 deliveries. Combined Model S and Model X deliveries in Q4 grew 10% globally compared to our prior record in Q3, and they grew 28% compared to Q4 2016. As we indicated heading into Q4, production of Model S and Model X during the quarter was limited to 22,137 vehicles due to reallocation of some of the manufacturing resources to Model 3 production. This enabled us to reduce our finished-goods inventory to the lowest level in about 18 months.

Also:

We continue to target weekly Model 3 production rates of 2,500 by the end of Q1 and 5,000 by the end of Q2. It is important to note that while these are the levels we are focused on hitting and we have plans in place to achieve them, our prior experience on the Model 3 ramp has demonstrated the difficulty of accurately forecasting specific production rates at specific points in time. What we can say with confidence is that we are taking many actions to systematically address bottlenecks and add capacity in places like the battery module line where we have experienced constraints, and these actions should result in our production rate significantly increasing during the rest of Q1 and through Q2.

The question is whether the company will be bringing its production difficulties to a factory in China, assuming it can ever strike a deal there.

While results did beat consensus expectations for the latest quarter, the company still posted a massive loss and underdelivered on its Model S and Model X vehicles. Analysts, not surprisingly, had mixed reactions to that performance:

CFRA (S&P) reiterated a Sell rating on Tesla with a $275 price target.
Merrill Lynch maintained its Underperform rating with a $180 price objective.
Sanford Bernstein has a Neutral rating and a $265 price target.
Goldman Sachs has a Sell rating with a $205 price target.
Piper Jaffray has a Buy rating with a $385 price target.
Berenberg raised its price target to $470 from $455.
Cowen raised the price target from $170 to $200.
Deutsche Bank raised the price target from $310 to $365.
Dougherty raised its target price to $400 from $340.
JPMorgan has an Underweight rating and raised its target to $190 from $185.

The failure to get a deal done in China is likely to leave analysts — and investors — even more unimpressed.

Shares of Tesla closed most recently at $323.66, with a consensus analyst price target of $321.70 and a 52-week range of $242.01 to $389.61. The stock is down about 7% in the past week.

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About the Author Trey Thoelcke →

Trey has been an editor and author at 24/7 Wall St. for more than a decade, where he has published thousands of articles analyzing corporate earnings, dividend stocks, short interest, insider buying, private equity, and market trends. His comprehensive coverage spans the full spectrum of financial markets, from blue-chip stalwarts to emerging growth companies.

Beyond 24/7 Wall St., Trey has created and edited financial content for Benzinga and AOL's BloggingStocks, contributing additional hundreds of articles to the investment community. He previously oversaw the 24/7 Climate Insights site, managing editorial operations and content strategy, and currently oversees and creates content for My Investing News.

Trey's editorial expertise extends across multiple publishing environments. He served as production editor at Dearborn Financial Publishing and development editor at Kaplan, where he helped shape financial education materials. Earlier in his career, he worked as a writer-producer at SVE. His freelance editing portfolio includes work for prestigious clients such as Sage Publications, Rand McNally, the Institute for Supply Management, the American Library Association, Eggplant Literary Productions, and Spiegel.

Outside of financial journalism, Trey writes fiction and has been an active member of the writing community for years, overseeing a long-running critique group and moderating workshop sessions at regional conventions. He lives with his family in an old house in the Midwest.