Why Tesla Dropped While Nio and Li Auto Shares Jumped Early Today

What happened

Tesla (NASDAQ: TSLA) has put much time and focus into expanding production capacity at its plant in Shanghai, China. There are indications that those efforts will pay off, but the stock is getting hit Thursday after a large unrelated recall from the EV leader. Tesla shares fell by more than 4% in morning trading, and were still down by 3.1% as of noon ET.

Meanwhile, shares of Chinese EV makers Nio (NYSE: NIO) and Li Auto (NASDAQ: LI) went in the other direction after a sign that EV demand remains strong in China. Nio was up nearly 5% and Li Auto 10% at their respective highs of the day. As of noon ET, Li was still up 7.3%, but Nio had relinquished its gains.

So what

Tesla is recalling 1.1 million of its electric vehicles due to concerns about the way their fully automatic windows react when they detect obstructions while closing. The key concern is that those closing windows "may exert more force" than they are supposed to before reversing automatically, which could pinch drivers or riders. The recalls include Model 3 vehicles made since 2017, as well as multiple model years for the Model Y, Model S, and Model X, according to The Wall Street Journal.

This news seems to be hitting the stock on a day when news out of China might otherwise have provided it with a boost. However, it's worth noting that Tesla plans to fix the problem with over-the-air software updates, so the costs to the company for the fix should be minimal. The automaker also said it was not aware of any accidents or injuries related to the problem.

Interior view of customer driving Li Auto L9 SUV.

Image source: Li Auto.

Now what

News from Li Auto drove the Chinese EV makers higher Thursday. The maker of battery-electric vehicles that also include small gasoline engines as "range extenders" made a surprise announcement that it would be launching its new L8 SUV earlier than planned at the end of September.

Yanan Shen, co-founder and president of Li Auto, said the early launch was "based on overwhelming market response in anticipation of its release." That's good news, since demand in China has been inconsistent since the spring, when a series of COVID-19 lockdowns in major Chinese cities began to impact both production and consumer demand across the industry.

Tesla took advantage of some of those delays to implement planned increases in production capacity at its Shanghai plant. That facility now has the ability to produce about 1.1 million vehicles per year.

Nio has also been increasing its capacity and launching new models. That company expects to begin deliveries of its mid-size ET5 sedan later this month and has high expectations for it. Investors appear to be viewing the high demand for Li Auto's new SUV as a good sign for Nio as well.

Tesla's recall announcement may have dampened investors' enthusiasm about its stock, and Li's news may have boosted their opinions about Nio's outlook -- but the market may have overreacted on both fronts Thursday. Still, if the EV market in China does rebound as expected, it really should be good news for all three of these companies.

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Howard Smith has positions in Nio Inc. The Motley Fool has positions in and recommends Nio Inc. and Tesla. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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