Tesla Will Achieve Industry-Leading Operating Margins And Profitability With Capacity Expansion And Localization Plans Underway

The first quarter of 2020 was complicated by the global crisis in connection with the pandemic. Automakers around the globe have reported on the sad results of their financial situation, but this does not apply to Tesla.

Q1 2020 was the first time in their history that company achieved a positive GAAP net income in the seasonally weak first quarter. Despite global operational challenges, the company was able to achieve their best first quarter for both production and deliveries.

The company reported that although impacted by inefficiencies related to the temporary suspension of production and deliveries in many locations, their gross margin remained strong. At Gigafactory Shanghai, further volume growth resulted in a material improvement in margins of locally made Model 3 vehicles. In addition, Model Y contributed profits, which is the first time in automaker's history that a new product has been profitable in its first quarter.

Source: Bloomberg

While near-term cash flow guidance is currently on hold, Tesla continuing to significantly invest in their product roadmap and long-term capacity expansion plans as they have sufficient liquidity. Model Y production lines in Shanghai and Berlin remain company most important near-term projects.

The report emphasized that Tesla believes that it will achieve industry-leading operating margins and profitability with plans for capacity expansion and localization.

"While near-term profit guidance is currently on hold, we believe we will achieve industry leading operating margins and profitability with capacity expansion and localization plans underway."

The company expect that production of both Model Y in Fremont and Model 3 in Shanghai will continue to ramp gradually through Q2. They are continuing to build capacity for Model Y at Gigafactory Berlin and Gigafactory Shanghai and remain on track to start deliveries from both locations in 2021.

In early Q1, Tesla began production of Model Y in Fremont, using a combination of new production lines as well as shared capacity with Model 3. The automaker's simplified and scalable approach to manufacturing is starting to take effect. Tesla was able to build more Model Y vehicles in its first quarter of production than in the first two quarters of Model 3 in 2017. Model Y production also exceeded the first quarter of production of Model 3 in Shanghai, demonstrating continued improvements in program execution. Additionally, the company achieved positive gross margin for Model Y in its first production quarter.

Tesla's Gigafactory Shanghai ramp is progressing according to plan. Due to better than expected progress, the company believe Model 3 will achieve a production rate of ~ 4,000/week by mid-2020.

The automaker recently finished the land preparation phase on its Gigafactory Berlin-Brandenburg and are about to break ground on the construction phase of this project. Based on the current progress, the company intends to launch the first Model Y deliveries from Gigafactory Berlin in 2021.

In addition, CEO Elon Musk during the recently-held Q1 Earnings Call, said that within the next 3 months there will be an announcement where a new Cybertruck Gigafactory will be built.