BYD Speeds Ahead in Chinese EV Race With Extreme Price Cuts
Tesla's European business could be among the casualties as Chinese electric-car makers eye better profit margins abroad and mull matching BYD’s hefty discounts.
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It’s a second day of struggle for the shares of electric vehicle makers in Hong Kong today, after market-share leader BYD BYDDY (HK:1211) launched a full-on blitz in the price war inside China.
BYD has slashed prices on 22 EV and hybrid models by as much as a third. The discounts will run until June, helping the company shift older stock now that it pledges to introduce its driver-assist function even on its cheapest models.
U.S.-Listed Shares to Fall Today
So we can expect the U.S.-listed shares of Chinese EV makers to sell off hard when trading resumes after Memorial Day. But I would argue this makes an attractive entry point to the stocks, so long as we’re able to identify the likely winners in a highly competitive sector.
The Hang Seng SCHK Automobile Index fell 4.9% in Hong Kong on Monday, and an additional 0.5% on Tuesday. BYD shares are down 9.9% in Hong Kong since Friday’s close, through Tuesday.
It is likely that other Chinese carmakers will follow suit in cutting prices at home. In terms of U.S.-listed companies, Nio NIO is down 4.5% since Friday, Xpeng XPEV is down 4.1%, while Li Auto LI (HK:2015) inched just 1.2% lower.
The fierce war for market share inside China is driving Chinese EV makers to expand internationally, where they can achieve fatter profit margins. Europe and emerging markets are their main focus, given the heightened geopolitical tensions with the United States, which imposed a 100% tariff on Chinese EVs last September, under the Biden administration.
Bad News for Tesla
That’s bad news for Tesla TSLA in Europe, where its sales are already flagging. Tesla’s April sales fell 49% year-on-year in Europe, as it fends with cheaper Chinese competition and the backlash over Elon Musk’s political stance. Tesla’s European market share dropped to just 0.7%, from 1.3% a year ago.
BYD sold more cars in Europe than Tesla for the first time, with sales skyrocketing 359%. Overall, the April sales show that EVs are growing as a segment in Europe, even as total auto sales across the continent fell 0.3%. All told, hybrids claim a 35.3% market share from January through April in Europe, with pure battery EVs at 15.3% and plug-in hybrids adding another 7.9% of sales.
So new-energy vehicles of some sort now make up 58.5% of sales in Europe, up from 48.1% for the first four months of last year.
Fatter Margins in Europe
Even after paying import tariffs, companies such as BYD can achieve better profit margins on vehicle sales in Europe. And BYD fared better than its competitors when tariffs rose last October, contending with a 17.4% extra import duty on BYD vehicles while Geely Automobile GELYF (HK:0175) must pay an added 20%, and SAIC Motors (SH:600104) is hit with the full 38.1%.
Given the existing 10% import duty on all EVs imported into the European Union, that means Chinese makers must pay as much as 48.1% to sell a Chinese-made car in Europe.
Inside China, BYD’s discounts extend even its cheapest Seagull model, which is seeing its price cut 20% to the equivalent of $7,760.
The company’s Seal dual-motor model has seen the largest reduction in price, down 34% to the equivalent of $14,300.
EV Industry’s 'Evergrande' Moment?
Although BYD is best-known for its lower-priced cars, it makes vehicles for virtually all price ranges, including the Yangwang U9 supercar, designed by former Lamborghini head designer Wolfgang Egger under BYD’s luxury brand.
Citi estimated that footfall into BYD’s dealerships jumped by 30% to 40% week-on-week after these price cuts.
Geely shares are down 11.0%, after it cut prices on Monday to combat BYD’s move. Great Wall Motor GWLLY HK:2333 is down 6.0% while SAIC Motors fell 3.5%.
Just anecdotally, I'm seeing tons of BYDs on the road here in Hong Kong as well as a lot more Xpeng, and a smattering of Great Wall cars.
It is likely that some of the Chinese EV makers will collapse as they fight for market share. Great Wall’s chairman, Wei Jianjun, warned on Friday that the EV industry already has its own “Evergrande,” referring to what was once the largest property developer in China, but collapsed under its massive debt burden.
“Now, Evergrande in the automobile industry already exists, but it has not collapsed,” Wei told Sina Finance in an interview. He did not specify what company he means but said some of the “main manufacturers” have concentrated too hard on chasing market share and pushing their share prices higher.
I’m confident that BYD will be a winner. At a 10% discount to where it finished last week, the stock offers an entry point for shares that have rallied 62.0% this year.
At the time of publication, Alex Frew McMillan was long BYD, XPeng and Li Auto.
