tesla through a china lens final june 24

7/25/2019 Tesla Through a China Lens FINAL June 24

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The China ScenarioTeslas Goal of 500,000 Cars in Three Years Through a China Lens

June 2016

Primary Author: Sam Jaffe

[email protected]


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All Rights Reserved Cairn Energy Research Advisors Ltd. 2016

EXECUTIVE SUMMARYTesla Motors stated mission of reaching annual production capacity of 500,000 cars by 2018

is a daunting goal that has been universally questioned. A central point of criticsnegativity

revolves around an understanding of the difficult task of manufacturing cars. No incumbent

car manufacturer has been able to scale up at such a dramatic rate in the modern era.

There is another place to search for a proof point, however: China. The Chinese car

manufacturing industry has grown from 1.4 million cars sold in the year 2000 to a record 24

million passenger cars sold in 2015. Almost all of those cars were domestically

manufactured. The Chinese automotive industry serves as a more realistic parallel to the

type of manufacturing build-out that Tesla is aiming to do.

In order to analyze the

manufacturing buildout that

Chinese car companies have

accomplished in the last

decade, Cairn ERA selected

the top ten Chinese domestic

auto manufacturers (ruling

out some that grew by

acquisition and others whose vehicle counts include a large number of non-passenger

vehicles). Additionally, all joint-ventures between Chinese car companies and foreign car

companies were eliminated from the sales numbers, so that only domestic manufacturers

building cars using their own expertise and their own capital were being counted. The top

three year periods of manufacturing buildout were identified and noted.

Based on this analysis of information, three Chinese car companies were able to grow during

a three-year period at a rate at or above what Tesla Motors must reach in the coming three

years (114.6%) in order to reach its goal of 500,000 vehicles produced in 2018. The averagebest three-year growth rates of all ten Chinese carmakers (85.9%), if applied to Tesla, would

result in the production of 340,000 cars in 2018. Based on our understanding of Teslas

manufacturing process (which is significantly simpler than the manufacturing process for

making internal combustion vehicles), Cairn ERA estimates that the most likely scenario is

that Tesla will make 450,000 cars in 2018.

Figure 1: Tesla Model S Assembly Line, Fremont, CA (Source: Teslarati)


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TABLE OF CONTENTSEXECUTIVE SUMMARY ............................................................................................................... 2

TABLE OF FIGURES ..................................................................................................................... 4

TABLE OF TABLES ....................................................................................................................... 4

INTRODUCTION .......................................................................................................................... 5

TESLAS CHALLENGE................................................................................................................... 6

THE CHINESE AUTOMOTIVE INDUSTRY IN CONTEXT ................................................................. 8

CHINAS AUTOMOTIVE COMPETITIVE LANDSCAPE................................................................. 11

Chery Automobile Co. .......................................................................................................... 12

Zhejiang Geely Holding Group Co. ....................................................................................... 13

BYD Auto .............................................................................................................................. 14

FAW Automotive.................................................................................................................. 16

Changan Automobile Group ................................................................................................ 17

SAIC Motor Corp. ................................................................................................................. 18

Dongfeng Motor Corp. ......................................................................................................... 20

Great Wall Motors ............................................................................................................... 21

Brilliance Auto Group........................................................................................................... 22

Beijing Automotive Industry Holding Co.............................................................................. 23

GROWTH CURVES OF CHINESE AUTO MANUFACTURERS ....................................................... 24

PREDICTION OF TESLAS GROWTH .......................................................................................... 26


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TABLE OF FIGURESFigure 1: Tesla Model S Assembly Line, Fremont, CA (Source: Teslarati) .................................. 2

Figure 2: Required CAGRs for Tesla to Reach Production Goals in 2018.................................. 7

Figure 3: Chinese Domestic New Car Sales by Year, 2001-2015 ............................................... 8

Figure 4: Chinese Automotive Market New Sales Segmentation, 2001-2015........................... 9

Figure 5: Annual Passenger Vehicle Production by Chinese Manufacturer, Thousands of Cars,

Top Ten Chinese OEM's, 2001-2015 ........................................................................................ 10

Figure 6: Chery QQ Compact (Source: Wikimedia Commons) ................................................ 12

Figure 7: Geely C7 Sedan (Source: Wikimedia Commons) ...................................................... 14

Figure 8: BYD E6 Owned by the Shenzhen Police Department (Source: Wikimedia Commons)

................................................................................................................................................. 15

Figure 9: FAW Ziyoufeng Minivan (Source: Wikimedia Commons) ......................................... 16

Figure 10: Changan CS75 SUV (Source: Wikimedia Commons) ............................................... 18

Figure 11: Roewe 550 Sedan made by SAIC (Source: Wikimedia Commons).......................... 19

Figure 12: Dongfeng A60 Sedan (Source: Wikimedia Commons) ............................................ 20

Figure 13: Great Wall Hover SUV (Source: Wikimedia Commons) .......................................... 21Figure 14: Brilliance Junjie Sedan (Source: Wikimedia Commons) ......................................... 22

Figure 15: BAIC Senova Crossover (Source: China Daily) ......................................................... 24

Figure 16: Highest 3-Year CAGR for Each of the Top Ten Chinese Car Manufacturers Over the

Last Ten Years .......................................................................................................................... 25

TABLE OF TABLESTable 1: Chery Annual Passenger Vehicle Production, Thousands of Cars, 2001-2015 .......... 13

Table 2: Geely Annual Passenger Vehicle Production, Thousands of Cars, 2001-2015 .......... 14

Table 3: BYD Annual Passenger Vehicle Production, Thousands of Cars, 2001-2015 ............. 15

Table 4: China FAW Annual Passenger Vehicle Production, Thousands of Cars, 2001-2015 .. 17

Table 5: Changan Annual Passenger Vehicle Production, Thousands of Cars, 2001-2015 ...... 18

Table 6: SAIC Annual Passenger Vehicle Production, Thousands of Cars, 2001-2015 ............ 19

Table 7:Dongfeng Annual Passenger Vehicle Production, Thousands of Cars, 2001-2015 ..... 20

Table 8: Great Wall Annual Passenger Vehicle Production, Thousands of Cars, 2001-2015 .. 22

Table 9: Brilliance Annual Passenger Vehicle Production, Thousands of Cars, 2001-2015 ..... 23

Table 10: BAIC Annual Passenger Vehicle Production, Thousands of Cars, 2001-2015 .......... 24
http://c/Users/Sam/Documents/Cairn%20ERA/Cairn%20ERA%20Current%20Projects/Tesla%202018%20Report/Tesla%202018%20Report%20Draft%20June%208.docx%23_Toc454541577http://c/Users/Sam/Documents/Cairn%20ERA/Cairn%20ERA%20Current%20Projects/Tesla%202018%20Report/Tesla%202018%20Report%20Draft%20June%208.docx%23_Toc454541577


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INTRODUCTIONOn Wednesday, May 4th, Tesla Motors CEO Elon Musk announced that the company

was going to accelerate its production plan for its upcoming Model 3 vehicle. The

original goal of manufacturing and selling 500,000 cars in total by 2020 was moved

up to the calendar year 2018. If achieved, the production plan will be quite a

remarkable feat, especially considering that Tesla only made 50,580 cars in 2015. In

order to achieve that goal, the company must increase its annual production rate by

an annual average of 114.6% over the next three years.

Analysts, including those at Cairn ERA, nearly universally scoffed at the possibility of

Tesla engineering such an enormous change in manufacturing capabilities in such a

short time period. The traditional automotive industrywhen it isnt in the process

of contractingrarely is able to grow annual production in double digits, no less

triple digits. Automotive executives from the major German, Japanese and U.S.

carmakers echoed the pessimism of analysts that such an enormous increase in

manufacturing capacity hasnt been successfully achieved by anyone in the sector in

the last century over the course of five years (Teslas original timeline), no less

within three years.

After being given a month to analyze and model the Tesla growth plan, however,

Cairn ERA is reconsidering its original position. This was after contemplating a part of

the automotive industry that has been able to produce such growth in short time

periods: Chinese carmakers.

The Chinese automotive market is now the largest in the world, with more than 21.1

million passenger vehicles sold in that country in 2015. More than 90% of those cars

were made domestically, either by standalone Chinese manufacturers or through

local joint ventures between foreign carmakers and Chinese companies. In the year

2000, only 1.4 million new cars were sold in China.


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Conventional wisdom in the automotive industry has long declared that theres no

such thing as automotive startups. Since the industry consolidated in Europe and

North America in the 1920s, no new companies have emerged from scratch to

become automotive manufacturers competing on the global stage. If this concept

were true, it would make Tesla Motors the first exception to the rule in more than

100 years.

When China is factored into the picture, however, the concept is most definitely not

true. More than three dozen large automotive manufacturers have sprung up in

China in the last twenty years, all growing from industrial startups (albeit ones

usually being backed by powerful state-owned enterprises) into large enterprises

with a nationaland in some cases a globalreach. Some of those companies have

failed. Others have merged with competitors. Today, the Chinese automotive

industry is a thriving landscape with almost twenty players. Each of those companies

went through a period of dramatic growth to achieve a critical manufacturing mass

that allows them to compete with other mass manufacturers.

To use the Chinese car companies as a basis for analysis of the probability of Teslas

ambitious production goals, Cairn ERA set out to analyze the manner, pace and scale

of growth of the large Chinese firms. This report is the end result of that analysis.

TESLAS CHALLENGETesla Motors was founded in 2003 by a handful of technology industry engineers

and investors, including Marc Tarpenning, Martin Eberhard, Ian Wright, J.B. Straubel

and Elon Musk. The companys mission from the beginning was to transform the

automotive sector by making battery-powered electric drivetrain vehicles feasible

from a practical, financial and attractiveness standpoint.

The companys first car, a two-seat sports car called the Tesla Roadster, was

originally designed to run off of Lithium-ion batteries made for the computer

industry. The Roadster, which was contract manufactured in Finland, went on to sell

more than 100,000 units. Tesla followed that up with the even more successful


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Model S, a luxury sedan, which was launched in 2012. As of the end of 2015, the

Model S had sold more than 107,000 units cumulatively. In 2015, the company

officially began sales of its Model X SUV crossover model.

With two active models (the Roadster has been discontinued but will be revived in

2019), Tesla produced a total of 50,580 vehicles in the calendar year of 2015, the

vast majority of which were Model S sedans. The company expects to reach

somewhere between 80,000 and 90,000 units produced in 2016, which would

segment into approximately three-fourths Model S and one-fourth Model X. It has

already achieved its initial goals for the first two quarters of the year and is on track

to achieve its annual goal.

Figure 2: Required CAGRs for Tesla to Reach Production Goals in 2018

Source: Cairn ERA, CAIN, CAAM, China Bureau of Statistics, Manufacturers

In order to achieve a 500,000 annual production capacity in 2018, Tesla will have to

grow its 2015 capacity of 50,580 vehicles produced by an average annual rate of

114.6% over the next three years (2016, 2017 & 2018). The three-year average

annual growth rate for each step change of 50,000 cars under the production goal of

500,000 by 2018 is shown in Figure 1. For instance, for Tesla to reach 350,000 annual

114.6%

107.2%

99.2%

90.6%

81.0%

70.3%

58.1%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0%

500,000

450,000

400,000

350,000

300,000

250,000

200,000

Required CAGR's For Tesla To Reach Production Goals


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production capacity by 2018, that would equal an annual growth in production

capabilities over the coming three years of 90.6%.

THE CHINESE AUTOMOTIVE INDUSTRY IN CONTEXT

With its vast population and high rate of growth, China has always been one of the

worlds largest car markets. It wasnt until the 2000s, however, when that growth

amplified to the point where, in 2010, China became the worlds largest car market.

It has held that crown since then and is expected to do so for the foreseeable future.

In 2015, more than 24 million cars were sold in China. The next largest national

automotive market is the United States, which sold some 17 million cars in 2015.

Figure 3: Chinese Domestic New Car Sales by Year, 2001-2015


For most of Chinas modern history, automobiles were for industrial or agricultural

purposes. The first native Chinese auto manufacturers were born in the 1950s when

the central government launched several carmakers, including FAW, Changan and

DongFeng, to make military trucks and private limousines for the government elite.

0

5,000

10,000

15,000

20,000

25,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Cars Sold 1,071 1,332 2, 710 3, 122 4,303 5,755 7, 195 8, 794 12,274 14,015 15,011 15,870 20,096 22,368 24,109

THOUS

ANDSOFCARSSOLD


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That was the situation until the 1990s, when a wave of new car companies was

launched by state and municipal governments as well as by private entrepreneurs.

Today, there are more than 40 vehicle manufacturers in China. Most of them are

specialty or local companies with relatively small production capacity. Of those,

about one dozen are recognized as being major players in the national market.

The Chinese automotive market can be broken down into three categories: foreign-

badged but domestically produced vehicles (manufactured via joint ventures

between global carmakers and local companies), self-badged vehicles produced

domestically and imported cars. According to government data, the 2015 split

between the three categories was approximately 50% foreign-badged domestics,

40% domestic-badged and 10% imports. Importing of cars in China is only an option

for the extremely wealthy due to high tariffs and other regulatory disincentives.

Figure 4: Chinese Automotive Market New Sales Segmentation, 2001-2015


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Domestic Self-Badged Domestic Foreign-Badged Imports


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The production of domestically manufactured cars through joint ventures between

local companies and foreign automakers has been a common practice dating back to

the mid-1980s. Due to government regulations, these joint ventures must have at

least 51% domestic ownership. Nevertheless, most of the technology and

management of these operations are done by the foreign partner. Most Chinese car

manufacturers have an active joint venture manufacturing operation with a foreign

company. These joint ventures are kept organizationally separate from the self-

badged production operations of the local company.

Figure 5: Annual Passenger Vehicle Production by Chinese Manufacturer, Thousands of Cars, Top Ten Chinese

OEM's, 2001-2015


Prior to the 1990s, most domestically manufactured self-badged production

consisted of assembly of foreign tear-down automobile kits and was done on batch

production lines comprised primarily of manual labor. In the early 2000s, the

domestic manufacturing industry upped its game considerably, with a host of new

entrants, a flood of low-cost capital and a wealth of new industrial technology and

expertise gleaned from the multiple joint venture operations ongoing throughout

the country. Today, more than 40% of new cars sold in China are domestically

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Chery Geely BYD China FAW Changan

SAIC Dongfeng Great Wall Brilliance BAIC


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produced self-badged vehicles. In the last ten years, those companies that have

successfully built up their brand awareness and manufacturing capabilities in the

domestic market have begun to export cars throughout the world.

Cairn ERA has identified 12 domestic car brands that have cumulatively produced

more than 1 million vehicles. Of those twelve, two (JAC and Kandi) have been

eliminated from this study due to the use of acquisitions to build manufacturing

capacity (in the case of JAC) and the dominance of small neighborhood vehicles

(Kandi) that arent traditionally considered to be part of the automotive market. The

production capacity shown in Chart 2.3 illustrates the dramatic growth in the

production capacity of the top ten companies participating in the self-badged

portion of the Chinese automotive industry. As a whole, these companies have

increased production capacity from about 25,000 cars in 2001 to more than 4 million

cars in 2015. The highest growth period for this group occurred between 2007 and

2009, followed by a period of low-growth amidst the global recession. By 2013,

growth had picked up again and has continued through 2016.

CHINAS AUTOMOTIVE COMPETITIVE LANDSCAPEThere are more than 30 automotive manufacturers in China that could be considered

important players in the domestic car market. They are not all listed in this section.

Instead, the top ten domestic manufacturers of non-foreign-badged cars are summarized

below. Some significant companies are left out, thanks to their reliance on small, non-

highway-rated vehicles (such as Kandi) as a large proportion of their overall production, or

because of their reliance on mergers and acquisitions to be considered a top ten player

(such as JAC). Of the ten car companies listed below (in order of cumulative cars produced

since the year 2000), only the self-badged cars are listed below. Several of these companies

have joint ventures with foreign car companies where they produce foreign-badged cars in

China. Those operations are usually completely separate from the domestic-badged part of

the company. Only those domestic vehicles are counted in the numbers below.


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Chery Automobile Co.

Chery was founded in 1997 as a state-owned car manufacturer. Its headquarters is in Wuhu,

in Anhui province. It is still state-owned. Chery is now believed to be the largest car

manufacturer (without taking into account joint ventures with foreign companies), with

more than 408,000 vehicles produced in 2015 under its own brand. It is also the largest

exporter of cars in China, with a thriving market for its cars in the Middle East and Africa.

Figure 6: Chery QQ Compact (Source: Wikimedia Commons)

Its best-selling model historically has been the QQ compact, although its Tiggo SUV,

launched in 2010, has seen more than 100,000 annual sales. The company now has

assembly facilities in Brazil, Iran and more than a dozen other countries. In 2007, Chery

launched a joint venture with Israel Chemicals Corp. to form a luxury brand called Qoros

Auto, which launched its first model in 2013. Since its inception, Chery has produced over

4.7 million cars.


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Table 1: Chery Annual Passenger Vehicle Production, Thousands of Cars, 2001-2015


Chery reached a critical mass of 25,000 cars produced very early in 2001 (as shown in Table

1.2 in the green-shaded cell). Cherys strongest growth period began in 2005, which was the

beginning of a period that saw the highest growth in the Chinese domestic auto market. It

has grown entirely organically, without any major acquisitions of other carmakers in China.

Its highest 3-year growth period stretched from 2004 to 2007, during which its annual

growth reached 63.3% (as shown in Table 1.2 in the beige-shaded cell).

Zhejiang Geely Holding Group Co.

Geely is Chinas second-largest automotive manufacturer, with more than 4.1 million

vehicles produced under its badge since its founding in 1986. Geely is a privately owned

company with no ties to Chinese government or provincial government entities. It is based

in Hangzhou in Zheijang province. In 2010, Geely purchased the Swedish manufacturer

Volvo from its then-owner, Ford Motor. It is also now the second largest exporter of cars

from China, with significant sales in the Indian subcontinent, Africa, Eastern Europe and

South America.

Units 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Chery M Cars 25 49 85 87 189 292 379 334 411 548 551 533 437 455 408

CAGR % 96.0% 73.5% 2.4% 117.2% 54.5% 29.8% -11.9% 23.1% 33.3% 0.5% -3.3% -18.0% 4.1% -10.3%

Three Year CAGR % 51.5% 56.8% 50.9% 63.3% 20.9% 12.1% 13.1% 18.2% 9 .1% -7.3% -6.2% -8.5%


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Figure 7: Geely C7 Sedan (Source: Wikimedia Commons)

Geelys growth has been relatively slow and steady since it reached critical mass of

manufacturing in 2003 with 73,000 cars produced. Its highest three-year annualized growth

rate happened between 2003 and 2006, when it grew production by an annual rate of

40.4%.

Table 2: Geely Annual Passenger Vehicle Production, Thousands of Cars, 2001-2015


BYD Auto

BYD Co. is a public company (listed on the Hong Kong Stock Exchange) based in Shenzhen.

The automotive subsidiary is called BYD Auto. The parent company was founded in 1995 as

a battery manufacturer and started manufacturing cars in 2003 with the acquisition of

Tsinchuan Automobile Co. It is now the third largest automaker in China, having produced

more than 3.6 million cars since its inception. It is also the largest manufacturer of electric

buses in the world.

Units 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Geely M Cars 0 0 74 98 143 205 219 221 329 414 432 491 549 425 532

CAGR % 32.4% 45.9% 43.4% 6.8% 0.9% 48.9% 25.8% 4.3% 13.7% 11.8% -22.6% 25.2%Three Year CAGR % 40.4% 30.7% 15.6% 17.1% 23.6% 25.0% 14.3% 9.9% -0.5% 2.7%


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Figure 8: BYD E6 Owned by the Shenzhen Police Department (Source: Wikimedia Commons)

The most popular model in BYDs lineup has been the F3 compact sedan. In 2015, company

has become the largest global manufacturer of electric drivetrain vehicles, with more than

61,000 passenger cars and more than 20,000 electric buses sold in that year. The company

now exports to all continents, with significant sales in Eastern Europe and South America. It

reached critical mass of production in 2006 when it reached 64,000 cars produced. Its

highest three-year rate of annualized growth was the period of 2006 to 2009, when it

reached a CAGR of 91.3%.

Table 3: BYD Annual Passenger Vehicle Production, Thousands of Cars, 2001-2015


Units 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

BYD M Cars 0 0 23 18 11 64 100 170 448 519 448 456 506 437 452

CAGR % 56.3% 70.0% 163.5% 15.8% -13.7% 1.8% 11.0% -13.6% 3.4%

Three Year CAGR % 91.3% 73.1% 38.1% 0.6% -0.8% -0.8% -0.3%


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FAW Automotive

FAW Automotive is a state-owned car manufacturer that is part of the larger FAW Group

Corporation. It is headquartered in the city of Changchun, in Jilin province. The name FAW

stands for First Automobile Works. Unlike most other Chinese car manufacturers, which

were founded in the last twenty years, FAW was created in 1953 as the countrys first

manufacturer of military vehicles. It made its first automobiles (limousines for high ranking

government officials) in the late 1950s. FAW was also one of the first Chinese

manufacturers to initiate a joint venture with a foreign manufacturer: it established ties

with Volkswagen in 1990. Since 2003, when it entered into large-scale passenger car

production under its own brand, the company has produced almost 3.8 million cars. It is also

the largest domestic manufacturer of commercial trucks.

Figure 9: FAW Ziyoufeng Minivan (Source: Wikimedia Commons)


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Despite the companys dramatic growth through 2010, it has seen a contraction of

production since that year for its own badged production (it still produces several million

cars each year with its foreign partners). The highest period of growth for its own branded

vehicles happened between the years 2007 and 2010, when it grew production at an

annualized rate of 26.4%.

Table 4: China FAW Annual Passenger Vehicle Production, Thousands of Cars, 2001-2015


Changan Automobile Group

Changan Automobile is a state-owned corporation based in Chongqing in the province of

Sichuan. Established as a small military vehicle manufacturer in the 1950s, it started

producing passenger consumer vehicles in 2007. It has since become one of the largest car

manufacturers in the country, primarily through its joint ventures with Peugeot, Ford, Suzukiand Mazda. By the end of 2015, the company had produced more than 3.4 million self-

branded vehicles since its inception.

Units 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

China FAW M Cars 0 0 145 144 204 206 214 226 310 432 405 305 298 272 225

CAGR % -0.7% 41.7% 1.0% 3.9% 5.6% 37.2% 39.4% -6.3% -24.7% -2.3% -8.7% -17.3%

Three Year CAGR % 12.4% 14.1% 3.5% 14.6% 26.4% 21.5% -0.5% -11.6% -12.4% -9.6%


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Figure 10: Changan CS75 SUV (Source: Wikimedia Commons)

Changans highest period of growth occurred between the years of 2008 and 2011, when it

increased production at an annualized rate of 73.6%. These numbers do not include the

production from two companies that were acquired in 2008, one of which was later sold to

another carmaker, BAIC.

Table 5: Changan Annual Passenger Vehicle Production, Thousands of Cars, 2001-2015


SAIC Motor Corp.

SAIC Motor Corp., whose name originally stood for Shanghai Automotive Industry Corp., is a

state-owned corporation based in Shanghai. It is owned by the municipality of Shanghai. It

has been making passenger cars (as well as military vehicles) since the 1950s, however it

didnt start large-scale manufacturing until its first joint-venture partnership with

Volkswagen in 1985. Counting its partnerships with Volkswagen and General Motors, SAIC

Units 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Changan M Cars 0 0 0 0 0 3 50 39 98 190 204 229 500 710 937

CAGR % -22.0% 151.3% 93.9% 7.4% 12.3% 118.3% 42.0% 32.0%

Three Year CAGR % 56.0% 73.6% 32.7% 38.1% 51.5% 59.9%


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probably produces more cars than any other manufacturer in China. It wasnt until 2008 that

it started making self-badged vehicles for the domestic market, primarily under the Roewe

brand name. By the end of 2015, the company had produced a total of 1.9 million self-

branded vehicles.

Figure 11: Roewe 550 Sedan made by SAIC (Source: Wikimedia Commons)

SAIC began large-scale production of self-badged vehicles in 2008, but saw a major

contraction in production in 2010 due to fallout from the global recession. The company

continued to grow its production after that and saw its greatest period of production growth

between the years 2010 and 2013, when it grew at an annualized rate of 12.7%. Since that

period, however SAIC has seen production decline dramatically.

Table 6: SAIC Annual Passenger Vehicle Production, Thousands of Cars, 2001-2015


Units 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

SAIC M Cars 0 0 0 0 0 0 17 259 684 160 164 199 229 180 169

CAGR % 164.1% -76.6% 2.5% 21.3% 15.1% -21.4% -6.1%

Three Year CAGR % -14.1% -33.7% 12.7% 3.2% -5.3%


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DongFeng Motor Corp.

DongFeng Motor Corp. is a state-owned manufacturer based in Wuhan, which is in Hubei

province. It is state-owned, although it has several subsidiaries that are listed on various

stock exchanges. It was founded in 1969 as a truck manufacturer. It has joint venture

businesses with Peugeot, Citroen, Kia, Honda and Renault. It started producing self-badged

passenger cars in 2003.

Figure 12: DongFeng A60 Sedan (Source: Wikimedia Commons)

DongFeng reached a critical mass of 25,000 cars produced in 2007. Its period of highest

production growth happened between the years 2008 and 2011, when it grew

manufacturing at a rate of 69.6% each year.

Table 7:Dongfeng Annual Passenger Vehicle Production, Thousands of Cars, 2001-2015


Units 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Dongfeng M Cars 0 0 10 17 18 19 25 33 74 92 161 224 324 437 537

CAGR % 32.0% 124.2% 24.3% 75.0% 39.1% 44.6% 34.9% 22.9%

Three Year CAGR % 54.4% 69.6% 44.7% 52.1% 39.5% 33.8%


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Great Wall Motors

Great Wall Motors is headquartered in Baoding in Heibei province. It was formed in 1984 as

a small truck manufacturer. It is best known in China primarily as a personal truck and SUV

producer. It sells vehicles under the Great Wall and Haval badges. By the end of 2015, the

company had produced a total of 1.4 million self-badged personal vehicles. The company

also exports its trucks and SUVs throughout the world and has assembly sites in more than

a dozen foreign countries.

Figure 13: Great Wall Hover SUV (Source: Wikimedia Commons)

Great Wall reached critical mass of manufacturing capacity in 2004 when it produced 27,000

vehicles. Its highest period of production growth, however, happened between the years

2007 and 2010, when it grew at a rate of 194.6% annually. In the last two years, Great Wall

has seen a significant contraction of sales due to regulatory changes in China that dissuade

many SUV buyers.


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Table 8: Great Wall Annual Passenger Vehicle Production, Thousands of Cars, 2001-2015


Brilliance Auto Group

Brilliance Auto Group is based in Shenyang in the province of Liaoning. It is the only major

Chinese automotive company with a foreign stock listing (both on the Frankfurt and Hong

Kong stock exchanges). It began as a bus manufacturer in 1991. Brilliance produces BMW

sedans under a joint venture established with that company in 2003. By the end of 2015,

Brilliance had produced a total of 1.4 million vehicles under its own badge.

Figure 14: Brilliance Junjie Sedan (Source: Wikimedia Commons)

Units 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Great Wall M Cars 0 0 24 27 28 11 7 16 88 179 205 265 348 183 90

CAGR % 3.7% -60.7% -36.4% 128.6% 450.0% 103.4% 14.5% 29.3% 31.3% -47.4% -50.8%

Three Year CAGR % -36.2% -17.0% 100.0% 194.6% 134.0% 44.4% 24.8% -3.7% -30.2%


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Brilliances self-branded cars reached a critical mass of capacity in 2003 when it produced

25,000 consumer vehicles. Its highest rate of growth occurred between the years 2004 and

2007, when it grew production at an annualized rate of 118%.

Table 9: Brilliance Annual Passenger Vehicle Production, Thousands of Cars, 2001-2015


Beijing Automotive Industry Holding Co.

BAIC is a state-owned car manufacturer based in Beijing. It also is a major domestic

producer of industrial and agricultural vehicles. It has joint ventures with Hyundai and

Mercedes. Its current self-badged line of vehicles is based on technology acquired when it

purchased intellectual property from the defunct Swedish car company Saab in 2010.

Units 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Brilliance M Cars 0 0 25 11 100 60 114 86 105 159 134 152 188 137 161

CAGR % -56.0% 809.1% -40.0% 90.0% -24.6% 22.1% 51.4% -15.7% 13.4% 23.7% -27.1% 17.5%

Three Year CAGR % 33.9% 118.0% -4.9% 20.5% 11.7% 15.9% 13.1% 5.7% 0.7% 1.9%


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Figure 15: BAIC Senova Crossover (Source: China Daily)

BAIC has produced a total of 1 million self-branded vehicles in its history, with the vast

majority of that happening in just the last five years. Its highest rate of growth occurred

between the years of 2012 and 2015, when it grew at a rate of 168.7% annually.

Table 10: BAIC Annual Passenger Vehicle Production, Thousands of Cars, 2001-2015


GROWTH CURVES OF CHINESE AUTO MANUFACTURERS

To determine the nature of the historical precedent that the Chinese automakers

have set for Teslas production goals, Cairn ERA analyzed the growth rates of each of

the top ten domestic-badged car manufacturers. The analysis includes the following

steps:

Establishing the annual rate of car sales for self-manufactured, self-badged

vehicles produced in China, going back to the year 2000.

Eliminating any joint-venture production numbers from the annual

production numbers. This ensured that the model is analyzing a car company

Units 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

BAIC M Cars 0 0 9 1 11 11 11 13 9 15 12 27 93 283 524

CAGR % 244.4% 204.3% 85.2%

Three Year CAGR % 168.7%


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building its own production capacity, not being subsidized by an incumbent

car manufacturer with deep pockets and existing manufacturing expertise.

Eliminating any production capacity that was acquired through purchase of a

pre-existing car manufacturer.

Calculating a three-year compound annual growth rate in production for

each three-year period between 2000 and 2015.

Establishing a start-year for each company when it first produced 25,000 or

more cars. This eliminated the misleadingly high annual growth rates during

which production was first ramped up. This action further made a more

appropriate match for Teslas current situation, in which it has already

reached a critical mass of manufacturing (Tesla produced more than 50,000cars in 2015). By only using three-year periods after which a critical mass of

25,000 cars had already been produced, a large number of three-year

periods were eliminated.

Figure 16: Highest 3-Year CAGR for Each of the Top Ten Chinese Car Manufacturers Over the Last Ten Years


63.3%

40.4%

91.3%

26.4%

73.6%

12.7%

69.6%

194.6%

118.0%

168.7%

85.9%

0.0% 50.0% 100.0% 150.0% 200.0% 250.0%

Chery

Geely

BYD

China FAW

Changan

SAIC

Dongfeng

Great Wall

Brilliance

BAIC

Average


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Once the above steps had been taken, the top three-year growth period for each

company was identified. The top three-year periods for each of the ten car

manufacturers are listed in Chart 3.1.

According to this analysis, the average of the top three-year periods for all

companies was 85.9%. The largest single three-year period belonged to Great Wall

Motors, at 194.6%. The smallest was SAIC, at 12.7%.

PREDICTION OF TESLAS GROWTH

Based on the analysis described above, three of the ten companies were able to

match or outperform the compound annual growth rate that Tesla will need to

match in order to reach 500,000 cars produced in 2018: 114.6%. In other words,

there is a statistically significant historical precedent for such an increase in

production capacity by an emerging car manufacturer. Tesla would have to grow at a

rate that 30% of its Chinese peers were able to reach during their strongest three-

year period of growth. Therefore, Cairn ERA considers the 500,000 car target to be a

plausible, if aggressive, scenario.

If Tesla is able to grow at a similar rate as the average of all ten Chinese automakers

included in this study, then it would end up reaching a production level of 340,497

cars in the year 2018. This is a reasonable set-point for a conservative scenario.

It is not the most likely scenario, however. The reason is the nature of the product.

The Tesla Model 3, which will comprise the majority of Tesla vehicles manufactured

in the year 2018, is a significantly cheaper car to assemble than any of the Chinese

cars made by the ten automakers surveyed in this study. Tesla has revealed that

there are approximately 8,000 discrete parts in a Model 3. Any internal combustion

vehicle, even the cheapest sub-economy model, will have at least 20,000 discrete

parts. An internal combustion engine (ICE)-based drivetrain is and always will be

dramatically more sophisticated and complex than any electric drivetrain vehicle.

Thats due to all the parts that make up a modern gasoline engine, as well as the


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complex differentials, transmissions and emissions compliance equipment in ICE

cars.

Two other important factors in production ramp-ups are market certainty and

access to capital. Because of the pre-order process for the Model 3, Tesla has

something that no car manufacturer has had in the past: absolute certainty that

there will be a market demand for at least 370,000 Model 3s inthe year 2018. This

is a dramatic advantage for any manufacturers production buildout planning. In

regards to capital, the company has already completed the issuance of stock for a

secondary capital raise of $2.6 billion. The company has stated publicly that this will

provide it will all the capital it will need to fund the rollout of the Model 3.

Because of the relative simplicity of assembling an electric drivetrain car, as well as

the market and capital guarantees that Tesla uniquely possesses, Cairn ERA believes

that Tesla will be able to exceed the average of its Chinese peers in increasing

production during the three-year period of production ramp-up. Therefore, Cairn

ERA believes that the most likely scenario of production capacity growth for Tesla

will be that it will successfully produce 450,000 cars in 2018, which would represent

a compound annual growth rate in production capacity of 107.2% over the next

three years.