BYD’s EV transition raises fears about a price war in China
BYD initiates a significant shift in the EV sector, prompting concerns over a price war within China’s market. The ongoing price war in China’s electric vehicle sector has led to a significant decline in share prices and has elicited an unprecedented response from Beijing. The shakeout may just be getting started. Despite the Chinese government’s attempts to curb price reductions initiated by market leader BYD Co., analysts indicate that a blend of declining demand and severe overcapacity will erode profits for the most robust brands and compel weaker competitors to exit the market. Despite the fact that the number of EV makers began to decline for the first time last year, the industry continues to operate at less than fifty percent of its production capacity.
Chinese authorities are attempting to mitigate the repercussions, admonishing the sector for “rat race competition” and convening leaders of prominent brands in Beijing last week. However, earlier efforts to intervene have yielded minimal results. In the near term, it appears that investors are wagering that few automakers will emerge unscathed: BYD, considered by many to be the most significant beneficiary of industry consolidation, has experienced a decline of $21.5 billion in market value since its shares reached their peak in late May. “What you’re seeing in China is disturbing, because there’s a lack of demand and extreme price cutting,” said John Murphy, a senior automotive analyst at Bank of America Corp. Ultimately, there will be “massive consolidation” to absorb the excess capacity, Murphy stated.
For automakers, persistent discounting diminishes profit margins, weakens brand value, and compels even financially robust companies into precarious financial situations. Inexpensive and subpar products pose a significant threat to the global standing of “Made-in-China” automobiles, as highlighted by the People’s Daily, a publication under the auspices of the Communist Party. That knock would arrive precisely as models from BYD, Geely, Zeekr, and Xpeng begin to garner recognition on the global stage.
For consumers, price drops may appear advantageous; however, they conceal more profound risks. Unpredictable pricing undermines long-term trust — individuals are expressing concerns on China’s social media, questioning the rationale behind purchasing a car now when it could be less expensive next week — meanwhile, there is a possibility that automakers, in their efforts to cut costs for survival, may scale back investments in quality, safety, and after-sales service.
Last week, auto CEOs received a directive to “self-regulate” and refrain from selling cars below cost or implementing unreasonable price cuts, as reported by sources familiar with the situation. The topic of zero-mileage cars emerged as well — vehicles with no recorded distance on their odometers are sold by dealers into the second-hand market, perceived broadly as a strategy for automakers to artificially boost sales and reduce inventory levels. Chinese automakers have been engaging in significantly more aggressive discounting compared to their foreign counterparts.
BofA’s Murphy stated that US automakers ought to exit the market. “Tesla probably needs to be there to compete with those companies and understand what’s going on, but there’s a lot of risk there for them.” It is evident that BYD, China’s No. 1 selling car brand, is at the forefront of price reductions. “It’s obvious to everyone that the biggest player is doing this,” stated Jochen Siebert, managing director at auto consultancy JSC Automotive. “They seek to establish a monopoly that compels all others to concede.” Concerns are mounting regarding BYD’s aggressive tactics, which may lead to potential dumping of cars, challenges in dealership management, and the “squeezing out of suppliers,” he said.
The pricing turmoil is occurring amidst a context of considerable overcapacity. According to data compiled by the Shanghai-based Gasgoo Automotive Research Institute, the average production utilization rate in China’s automotive industry stood at a modest 49.5% in 2024. An April report by AlixPartners highlights the intense competition that is beginning to emerge among new energy vehicle makers, or companies that produce pure battery cars and plug-in hybrids. In 2024, the market experienced its inaugural consolidation among NEV-dedicated brands, with 16 exiting and 13 launching. “The Chinese automotive market, despite its substantial scale, is growing at a slower speed.” “Automakers have to put top priority now on grabbing more market share,” said Ron Zheng, a partner at global consultancy Roland Berger GmbH.
Jiyue Auto exemplifies the rapid pace of change in the industry. A little over a year after launching its first car, the automaker, supported by prominent entities Zhejiang Geely Holding Group Co. and technology giant Baidu Inc., commenced a reduction in production and initiated efforts to secure additional funding. It presents a conundrum for all automobile manufacturers, particularly those that are smaller in scale. “If you don’t follow suit once a leading company makes a price move, you might lose the chance to stay at the table,” AlixPartners consultant Zhang Yichao stated. He noted that China’s low capacity utilization rate, which is “fundamentally fueling” the competition, is currently facing increased pressure from uncertainties surrounding exports.
As the drive to identify a market for surplus production propels an increasing number of Chinese brands towards exportation, the international markets can provide only limited respite. “The US market is completely closed and Japan and Korea may close very soon if they see an invasion of Chinese carmakers,” Siebert said. “Russia, which was the biggest export market last year, is now becoming very difficult.” I also don’t view Southeast Asia as a viable opportunity anymore.
The imperative of cost reduction has prompted analysts to voice apprehensions regarding the risks associated with supply chain finance. A demand for a price cut by BYD to one of its suppliers late last year has drawn attention to the potential ways in which the car giant might be employing supply chain financing to obscure its increasing debt levels. A report by accounting consultancy GMT Research indicated that BYD’s actual net debt is approximately 323 billion yuan ($45 billion), in contrast to the 27.7 billion yuan recorded on its balance sheet as of the end of June 2024.
The pain is also permeating China’s dealership network. Since April, dealership groups in two provinces have ceased operations, both of which were engaged in the sale of BYD cars. Beijing’s recent engagement with automakers was not the inaugural effort at establishing a ceasefire. In mid 2023, 16 major automakers, including Tesla Inc., BYD, and Geely, entered into a pact, observed by the China Association of Automobile Manufacturers, to refrain from “abnormal pricing.” Shortly thereafter, CAAM retracted one of the four commitments, asserting that the inclusion of pricing in the pledge was unsuitable and violated a principle established in the country’s antitrust legislation. The discounting persisted without interruption.
