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Tesla cuts Model 3 price again to qualify for Chinese subsidies

US EV maker ends first quarter with surprise profit and record delivery in China

Tesla said it has the capacity to exceed its 500,000 vehicle delivery goal despite production interruption due to the coronavirus.

PALO ALTO, U.S. -- Tesla will once again lower the price of its standard range Model 3 sedans in China in order to qualify for the country's newly announced government subsidies for electric vehicles, the U.S. automaker said in its Wednesday earnings call.

Last week, the Chinese Finance Ministry announced it will cut government subsidies for new-energy vehicles -- a category that includes electric cars -- by 10% this year, and that the subsidy will apply only to passenger cars costing less than 300,000 yuan, or around $42,390.

Tesla's China-made Model 3 sedans are currently priced at 323,800 yuan before subsidies, which disqualifies the automaker for the government incentives.

"We are making rapid progress on lowering the production costs in China, and we're actually excited to announce on this call that we will be reducing the price of the standard range Model 3 tomorrow [Friday China time]," Tesla CEO Elon Musk said on Wednesday.

The company did not disclose what the new price point for Model 3 in China will be after the planned reduction, but said it will be "below the subsidy limit."

"We feel confident it will still be a vehicle that delivers a good gross margin," Musk added.

It will be the second time this year for Tesla to cut the price of its entry-level 3 sedan this year. The company previously lowered the price by 9% in January.

For the three months ended March, Tesla reported nearly $6 billion in revenue, a 32% jump year over year. It recorded $16 million in net income for the period, its first ever profit for the first quarter.

The EV maker delivered a total of 88,496 vehicles in the past three months, up 40% from the same period last year. It did not break down regional delivery numbers in its earnings report, but data from data from the China Passenger Car Association shows it delivered 10,160 vehicles in China during March, its best month in the country yet.

"Our Shanghai Model 3 margins improved dramatically since the fourth quarter of last year, nearing equivalence of Model 3 built in Fremont. This is despite [the Shanghai factory] not yet running at full capacity, while also managing through the production shutdown in early February," Tesla CFO Zachary Kirkhorn said during the earnings call.

"We exited the quarter with our highest ever backlog [in China] yet again," he added.

Tesla shares surged more than 10% in after-hours trading Wednesday on the positive results.

Musk was also asked about the company's recent announcement that it has brought in Hiromichi Mizuno, a veteran Japanese financier, as a new member of its board.

"I think we all need a hero," the CEO said.

Mizuno previously served as executive managing director and chief investment officer of Japan's $1.5 trillion Government Pension Investment Fund -- one of the world's largest institutional investors -- since January 2015. The Japanese investment guru is known for his position against short-selling, a practice that has plagued Tesla.

"Hiro has been investing in the highest levels in the world ... and is just a very sensible, smart person who brings a lot to the board," Musk added.

Meanwhile, the coronavirus outbreak and shelter-in-place order in California that has forced Tesla to shut down its main manufacturing facility in Fremont will remain a "serious risk" for Tesla. However, the company said it has the capacity to reach its 500,000 vehicles delivery goal this year despite the interruption.

"We are a bit worried about not being able to resume production in the Bay Area, and that should be identified as a serious risk," Musk said.

Local officials said on Monday that the current shelter-in-place order in the Bay Area which includes Fremont, will be extended from May 3 until the end of the month.

"The Bay Area factory produces the majority of our cars. ...The extension of shelter in place, or frankly, I would call it forcibly imprisoning people in their homes against all their constitutional rights, is outrageous," Musk said.

"This is fascist. ... It will cause great harm to not just Tesla but many companies," he added.

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