Tesla Posts Record Earnings at Start of Turbulent Year

Tesla Inc. posted a record quarterly profit despite supply disruptions, fueled by rising deliveries and increasingly broad-based demand for electric vehicles.

The Silicon Valley car maker has enjoyed booming sales, driven by both its popular Model Y compact sport-utility vehicle and sustained demand in China. The company also has benefited from the wider embrace of plug-in cars as governments across the world push to phase out gasoline-powered vehicles, in some cases through subsidies.

“We’ve seen a real shift in customer perception of electric vehicles, and our demand is the best we’ve ever seen,” Chief Executive Elon Musk said Monday on an investor call.

Tesla on Monday said revenue in the first quarter jumped around 74% from the same period a year earlier to US$10.4 billion. The company generated a US$438 million net profit, up from $16 million a year ago. Wall Street on average expected the company to report sales of about $10.5 billion and net income of around $509 million for the January through March period, according to analysts surveyed by FactSet.

Tesla said it delivered 184,877 vehicles in the first three months of the year, more than double the number during the same period a year earlier. The company, which delivered nearly half a million vehicles in 2020, reaffirmed it expects that figure to rise more than 50% this year.

The company’s strong financial start to the year comes as it faces challenges on other fronts. Federal auto-safety officials are investigating the fatal fiery crash of a Model S sedan earlier this month in Texas. Neither of the victims was found in the driver’s seat, local officials have said. The National Highway Traffic Safety Administration’s probe of the wreck is one of more than two dozen investigations of crashes involving Tesla vehicles.

The crash left questions about whether or how the vehicle could have been operating without anyone in the driver’s seat.

A Tesla executive said the company was working with local and federal authorities to investigate what happened.

The car’s steering wheel, he said on the call, was found to be deformed, “leading to the likelihood that someone was in the driver’s seat at the time of the crash.” All the seat belts, post crash, were found to be unbuckled, he said. Tesla wasn’t able to recover data from the car’s memory device.

Tesla conducted a study along with authorities in which the company tried to replicate the likely crash scenario, the executive said. The company said that a driver assistance feature that helps with steering didn’t engage in the test, while another feature, adaptive cruise control, only activated when a driver was buckled in and traveling at above 5 miles per hour.

Mark Herman, the constable whose precinct the crash happened in, declined to comment on Tesla’s statement that someone likely was in the driver’s seat at the time of the crash, saying that the incident remained under investigation.

Tesla has also faced parts shortages that led the company to briefly shut down its Fremont, Calif., factory in February. Rivals such as General Motors Co., Ford Motor Co. and Volkswagen AG have had to idle some production capacity because of a global semiconductor shortage.

“We were able to navigate through global chip-supply shortage issues in part by pivoting extremely quickly to new microcontrollers,” the company said in a note to shareholders, adding that it also was devising new software for chips made by new suppliers.

Mr. Musk said the past quarter “had some of the most difficult supply chain challenges that we’ve ever experienced.” Those go beyond computer chips, he said. China production was held back because key engineers couldn’t travel there because of Covid-19 related quarantine restrictions, he said. Some of the effects are likely to last in the current and following quarter, he said.

Tesla said it had successfully lowered the cost of making cars, helping offset a decline in the average price of its vehicles.

The company’s bottom line also benefited from several factors not directly linked to car sales. Its financial results have been aided by the sale of regulatory credits to rival auto makers that need them to comply with emissions-related rules. Such credits brought in $518 million in the most recent quarter, up from $354 million during the year-earlier period. Tesla has previously said it doesn’t expect such sales to be a material part of its business.

The company also said it saw a positive earnings effect from the sale of bitcoin in the period. Tesla bought $1.5 billion worth of the cryptocurrency in the first quarter and sold 10% of that, Chief Financial Officer Zach Kirkhorn said. The company is now accepting bitcoin as payment for products sold in the U.S.

Mr. Kirkhorn said the company opted to invest in bitcoin when it was looking for a place to store cash it didn’t immediately need as a way to preserve liquidity while also earning a return. “It is our intent to hold what we have long-term and continue to accumulate bitcoin from transactions from our customers as they purchase vehicles,” he said on the investor call.

Tesla’s success in popularizing electric vehicles transformed the company into the world’s most valuable car maker. Its success also spurred legacy car makers and startups alike to develop competing models, some of which are showing early signs of eroding Tesla’s market share.

In the U.S., for example, Tesla vehicles accounted for roughly 70% of the all-electric vehicles sold in the first quarter, according to the research firm Cox Automotive Inc. That is down from about 82% during the same period a year earlier.

Tesla’s stock soared more than eightfold last year. It is up roughly 4.5% in 2021 after advancing 1.2% on Monday ahead of results. The stock retreated more than 2% in after-hours trading.

Global demand for electric vehicles continues to increase, though, and Tesla is adding production capacity to keep pace. The company said it remains on track to begin producing vehicles this year at its new car plants near Austin, Texas, and outside Berlin, its first in Europe. Tesla has expanded capacity at its first overseas plant in Shanghai and began delivering China-made Model Y vehicles this year after kicking off with the Model 3 sedan in 2019.

China has been a growth engine for Tesla, helping to lift the company to its first full-year profit last year. But the company has hit a rough patch in the market recently. Chinese authorities summoned Tesla in February over consumer quality complaints. The government also restricted the use of Tesla vehicles by military personnel as well as employees at key state-owned companies over data-security concerns.

Earlier this month, a single protester with a disputed claim about the safety of Tesla’s vehicles drew widespread attention across the Chinese internet, which is closely controlled by the government.

Tesla has apologized for its treatment of some customers in China and said it would do better. Mr. Musk said last month that Tesla would be shut down if it used its vehicles to spy, which he said was “a very strong incentive for us to be very confidential.”

Tesla also reaffirmed that it expects to deliver its first semitrailer trucks to customers in 2021, two years after initially planned. Mr. Musk said in January that the company didn’t have enough battery cells to go into production with the vehicle.

For years, global companies showcased their Chinese operations as a source of robust growth. A burgeoning middle class, a stream of people moving to cities, and the creation of new services to cater to them—along with the promise of the further opening of the world’s second-largest economy—drew companies eager to tap into the action.

Then Covid hit, isolating China from much of the world. Chinese leader Xi Jinping tightened control of the economy, and U.S.-China relations hit a nadir. After decades of rapid growth, China’s economy is stuck in a rut, with increasing concerns about what will drive the next phase of its growth.

Though Chinese officials have acknowledged the sputtering economy, they have been reluctant to take more than incremental steps to reverse the trend. Making matters worse, government crackdowns on internet companies and measures to burst the country’s property bubble left households and businesses scarred.

Lowered Expectations

Now, multinational companies are taking a hard look at their Chinese operations and tempering their outlooks. Marriott International narrowed its global revenue per available room growth rate to 3% to 4%, citing continued weakness in China and expectations that demand could weaken further in the third quarter. Paris-based Kering , home to brands Gucci and Saint Laurent, posted a 22% decline in sales in the Asia-Pacific region, excluding Japan, in the first half amid weaker demand in Greater China, which includes Hong Kong and Macau.

Pricing pressure and deflation were common themes in quarterly results. Starbucks , which helped build a coffee culture in China over the past 25 years, described it as one of its most notable international challenges as it posted a 14% decline in sales from that business. As Chinese consumers reconsidered whether to spend money on Starbucks lattes, competitors such as Luckin Coffee increased pressure on the Seattle company. Starbucks executives said in their quarterly earnings call that “unprecedented store expansion” by rivals and a price war hurt profits and caused “significant disruptions” to the operating environment.

Executive anxiety extends beyond consumer companies. Elevator maker Otis Worldwide saw new-equipment orders in China fall by double digits in the second quarter, forcing it to cut its outlook for growth out of Asia. CEO Judy Marks told analysts on a quarterly earnings call that prices in China were down roughly 10% year over year, and she doesn’t see the pricing pressure abating. The company is turning to productivity improvements and cost cutting to blunt the hit.

Add in the uncertainty created by deteriorating U.S.-China relations, and many investors are steering clear. The iShares MSCI China exchange-traded fund has lost half its value since March 2021. Recovery attempts have been short-lived. undefined undefined And now some of those concerns are creeping into the U.S. market. “A decade ago China exposure [for a global company] was a way to add revenue growth to our portfolio,” says Margaret Vitrano, co-manager of large-cap growth strategies at ClearBridge Investments in New York. Today, she notes, “we now want to manage the risk of the China exposure.”

Vitrano expects improvement in 2025, but cautions it will be slow. Uncertainty over who will win the U.S. presidential election and the prospect of higher tariffs pose additional risks for global companies.

Behind the Malaise

For now, China is inching along at roughly 5% economic growth—down from a peak of 14% in 2007 and an average of about 8% in the 10 years before the pandemic. Chinese consumers hit by job losses and continued declines in property values are rethinking spending habits. Businesses worried about policy uncertainty are reluctant to invest and hire.

The trouble goes beyond frugal consumers. Xi is changing the economy’s growth model, relying less on the infrastructure and real estate market that fueled earlier growth. That means investing aggressively in manufacturing and exports as China looks to become more self-reliant and guard against geopolitical tensions.

The shift is hurting western multinationals, with deflationary forces amid burgeoning production capacity. “We have seen the investment community mark down expectations for these companies because they will have to change tack with lower-cost products and services,” says Joseph Quinlan, head of market strategy for the chief investment office at Merrill and Bank of America Private Bank.

Another challenge for multinationals outside of China is stiffened competition as Chinese companies innovate and expand—often with the backing of the government. Local rivals are upping the ante across sectors by building on their knowledge of local consumer preferences and the ability to produce higher-quality products.

Some global multinationals are having a hard time keeping up with homegrown innovation. Auto makers including General Motors have seen sales tumble and struggled to turn profitable as Chinese car shoppers increasingly opt for electric vehicles from BYD or NIO that are similar in price to internal-combustion-engine cars from foreign auto makers.

“China’s electric-vehicle makers have by leaps and bounds surpassed the capabilities of foreign brands who have a tie to the profit pool of internal combustible engines that they don’t want to disrupt,” says Christine Phillpotts, a fund manager for Ariel Investments’ emerging markets strategies.

Chinese companies are often faster than global rivals to market with new products or tweaks. “The cycle can be half of what it is for a global multinational with subsidiaries that need to check with headquarters, do an analysis, and then refresh,” Phillpotts says.

For many companies and investors, next year remains a question mark. Ashland CEO Guillermo Novo said in an August call with analysts that the chemical company was seeing a “big change” in China, with activity slowing and competition on pricing becoming more aggressive. The company, he said, was still trying to grasp the repercussions as it has created uncertainty in its 2025 outlook.

Sticking Around

Few companies are giving up. Executives at big global consumer and retail companies show no signs of reducing investment, with most still describing China as a long-term growth market, says Dana Telsey, CEO of Telsey Advisory Group.

Starbucks executives described the long-term opportunity as “significant,” with higher growth and margin opportunities in the future as China’s population continues to move from rural to suburban areas. But they also noted that their approach is evolving and they are in the early stages of exploring strategic partnerships.

Walmart sold its stake in August in Chinese e-commerce giant JD.com for $3.6 billion after an eight-year noncompete agreement expired. Analysts expect it to pump the money into its own Sam’s Club and Walmart China operation, which have benefited from the trend toward trading down in China.

“The story isn’t over for the global companies,” Phillpotts says. “It just means the effort and investment will be greater to compete.”

Corrections & Amplifications

Joseph Quinlan is head of market strategy for the chief investment office at Merrill and Bank of America Private Bank. An earlier version of this article incorrectly used his old title.

Tesla Posts Record Earnings at Start of Turbulent Year

Electric-vehicle pioneer faces safety investigations and mounting competition.

Multinationals like Starbucks and Marriott are taking a hard look at their Chinese operations—and tempering their outlooks.

Lowered Expectations

Behind the Malaise

Sticking Around