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Tesla's European Demand Problems Offer a Stark Warning

- By John Engle

With domestic demand problems piling up in early 2019, Tesla Inc. (TSLA) had to change course in earnest. While North American demand for the new Model 3 sedan failed to meet either Tesla's expectations or CEO Elon Musk's even more optimistic promises, hope remained that international markets would make up the difference.

An expedited rollout of the Model 3 to key international markets was seen as opportunity to bolster the company's limping growth story. Unfortunately, the hoped for boost, especially from the critical European market, has proven insufficient to stop the bleeding. Europe, by far Tesla's most important international market, has proven especially bleak.


Model 3: More fizzle than dazzle

After a flurry of Model 3 deliveries in the first quarter of 2019, things rapidly began to fizzle in major European markets by April. May's delivery numbers show little hope of improvement.

In Norway, Model 3 uptake slowed in May with just 705 deliveries, compared to 721 in April. , That is an obviously distressing demand level, given that Norway is Tesla's second-largest single market outside of North America.

Tesla apparently faced similar difficulties finding buyers in The Netherlands, delivering 420 Model 3s in May, a 10% decline from April's 464. The Dutch situation may actually be even worse than it at first appears. Tesla sold 77 Model 3s on the last day of the month, indicating a likely fleet sale. Tesla probably had to engage in discounting, as usually happens with fleet sales, meaning its already compressed margins probably took another hit.

While a smaller market compared to its northern peers, Spain's delivery numbers still add useful data points. Unlike Norway and The Netherlands, Spain actually saw a healthy increase in deliveries, rising to 122 in May from 51 in April.

Adding to Tesla's problems in Europe is the rise of competition in the electric vehicle market, many of which have been gaining traction across national markets. In Norway, for example, Volkswagen's (XTER:VOW) e-Golf blew past the Model 3 with 885 deliveries in May. Meanwhile, in The Netherlands, the Model 3 only managed to narrowly outsell Hyundai's (005385.KS) Kona thanks to its May 31 fleet sale.

Model S and X: Dead platforms walking

While the Model 3's struggles ought to be enough on their own to worry Tesla bulls, there is still more bad news for them to digest. Specifically, Tesla's former flagship products, the Model S luxury sedan and the Model X small SUV, have fallen from favor across major European markets.

In Norway, the Model S is ailing badly, delivering just 49 vehicles in May. While a slight uptick from the 30 delivered in April, it is a far cry from the 274 delivered in May 2018. The Model X showed respectable demand, with 263 deliveries in May, up significantly from the 71 in April and even slightly better than May 2018's 249. However, these strong numbers appear to be the result of highly-publicized deep price cuts, so unit volume maintenance comes at the cost of margins.

If the Model S was sick in Norway, it is on life-support in The Netherlands. A meager 11 vehicles were delivered in May, which might be called an improvement from April's two deliveries if we did not also know it had delivered 255 in May 2018. The Model X held its ground with 173 deliveries in May, a solid jump from April.

Verdict

Things do not look great for Tesla at the moment. With additional competitive offerings from a range of automakers set to enter European markets in the coming months, pressure on the Model 3's price point and market position will only increase. That does not bode well for the company's dreams of long-term market leadership in the mass-market electric vehicle space.

Tesla's high-end models present an even more daunting problem. Demand for the Model S and Model X have taken a beating thanks, in part, to the arrival of newer luxury electric options, such as the Audi e-Tron and Jaguar i-Pace. These two competitors saw respective May deliveries in Norway of 546 and 516. The Netherlands experienced similar market dynamics, with the e-Tron seeing 160 deliveries. Competition among luxury electric carmakers is set to intensify, which will likely exacerbate Tesla's problems. A promised refresh of the Model S and Model X in the coming months may help to rejuvenate the aging platforms, but its restriction to interiors will likely result in only marginal benefits long term.

As investors evaluate Tesla's prospects going forward, they should look to Europe as the proverbial canary in the coal mine. Tesla has already felt the pain of early competition in these markets, competition that is heading to its home turf very soon. Expect more pain ahead.

Disclosure: Author is short Tesla.

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This article first appeared on GuruFocus.