Tesla’s Price Cuts Spark Price War with Chinese Electric Vehicle Makers

Tesla (TSLA) today announced cuts in its Model S and X electric vehicle (EV) models for the second time this year.  The price cuts by Tesla this year have prompted some Chinese EV makers to cut their prices as well, sparking a price war between Tesla and BYD Co., China’s biggest EV maker.  As a result, shares of BYD Co. have fallen -14% since the start of February, while Tesla has risen +9%, and a gauge of global EV makers has dropped -9% over the same period.

Tesla has moved steadily higher this year, posting a 4-month high last month, and is up a whopping 94% from a 2-1/2 year low in January.  After cutting prices for some of its models for the second time this year, the price of the Tesla Model S is down -14% from January 12, and the Model X is down -17%.  At the company’s investor day last week, CEO Musk said ‘We found that even small changes in the price have a big effect on demand and that demand will go crazy as Tesla makes its cars more affordable.”

Since climbing to a 6-month high last month, the shares of BYD Co have retreated and lost $18 billion of market value.  Sentiment toward the stock has soured after many of the company’s dealers cut prices on some models to boost demand.  BYD Co has also fallen after Warren Buffet’s Berkshire Hathaway unloaded about $500 million of its holdings of BYD stock.

GAM Hong Kong Ltd warns that “a gradual industry shift is underway in the EV market as excessive price cuts can lead to buyers holding back, awaiting even lower prices, while having an excessively negative impact on margins for all players.  Also, lower input prices to data will not likely offset a negative hit to margins.”

Some analysts say BYD may hold up well despite a price war with Tesla as the company has better pricing power and controls most of its supply chain by producing its own chips and batteries.  Also, sales momentum remains strong for BYD after it reported sales jumped 85% year-on-year in February to 190,000 units, after a record year in 2022 when the company sold 1.86 million EVs.  Citigroup predicts that BYD will continue to gain market share over the long term as competitors burn through cash to increase their scale, leading to market consolidation and “intensified competition.”

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