Tesla’s Next Huge Challenge

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Tesla Inc. (NASDAQ: TSLA) CEO Elon Musk likes to say Tesla is not a car company but a robotics and artificial intelligence (AI) company. However, a look at its most recent earnings shows that is not the case, for now. Of its $28 billion of revenue in the most recent quarter, over $21 billion was from its automotive business.

The challenge to its valuation for now (Tesla has the 10th largest market cap in the world at $1.4 trillion) is unit sales. Local electric vehicle (EV) companies, led by BYD, have eaten into its market share in China. Its share of the U.S. EV market was less than 45%, as of this year’s second quarter. At one point, that was closer to 80%.

Tesla’s biggest sales challenge has been in the European Union. In some months of this year, sales were down by well into double-digit percentages year over year. Much of the challenge came from legacy companies, including Volkswagen, Mercedes, and BMW.

The United Kingdom is a market altogether different from the EU. As the Financial Times recently pointed out, it does not have the high tariffs on Chinese EVs that the EU and U.S. do. The Chinese EV companies can fight toe to toe with one another and the legacy car companies in the U.K. on an equal footing. “Currently the UK market is more open and a friend for Chinese brands,” Michael Yang, the head of Geely Auto UK, told the paper.

However, BYD is not the only Chinese EV company with a foothold in the U.K. That means that Tesla and BYD have another horse in their race.

Another ContenderRalph Orlowski / Getty Images

Geely Auto is part of Geely Holding. The company owns a piece of or all of niche brands Volvo, Polestar, Lotus, and Austin Martin. However, that is not the case in China. Geely unit sales in China for the first half of this year reached 1,409,180 vehicles, up 48% compared to the same period last year.

Geely’s target is to sell 100,000 units in the U.K., an ambitious goal given the size of the market. Geely has hinted that the key is to have production of the vehicles in the country, which would be a very large investment. That 100,000 figure would put it ahead of both BYD and Tesla, according to the Financial Times. The U.K. is BYD’s largest market outside of China.

China’s big car companies know that to be truly successful, they need to move outside their home market. Everywhere they go, they will find Tesla got there first. But, as Tesla is finding, being first has lost much of its advantage. As Geely pushes into a country that has been critical to Tesla’s future, Musk’s company and its troubled sales face a new wall.

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