Yahoo Finance China EV Price War Reaches Fever Pitch: An Analysis
A full-blown electric vehicle (EV) price war has erupted in China. U.S. EV king Tesla TSLA has sparked an EV price war in China that has resulted in massive price cuts by various automakers in the world’s largest car market. It all started in October when Tesla cut the prices of its popular models in China. The discounts were further escalated in January that made locally-produced cars up to 14% less expensive than 2022. In some cases, the prices of cars in China were around 50% cheaper than in the United States and Europe.
To keep up with the stiff competition, intensified by Tesla’s steep price reductions, rivals were left with little option but to follow the EV behemoth’s footsteps. Not only China-based EV makers like NIO Inc. NIO, XPeng Inc. XPEV and BYD Co Ltd BYD followed suit, legacy automakers including Ford F, Volkswagen and others also joined the EV price war bandwagon.
BYDDY currently sports a Zacks Rank #1 (Strong Buy). TSLA and XPEV are #3 Ranked (Hold) each, while F and NIO carry a Zacks Rank #4 (Sell) currently.
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Mad Rush to Slash Prices
China’s EV industry has experienced exponential growth since 2020, with sales doubling last year, in part due to government subsidies. However, with the subsidy program expiring in December 2022, competition has intensified in the EV space. This has resulted in a crowded market, with companies vying to attract buyers. In addition to that, an uncertain macro environment has started to hurt vehicle demand in the world’s biggest car market. China’s car sales dwindled 13% in the three months ending March 2023. While sales of gas-powered ICE vehicles plunged, growth in EV sales also slowed down, per the China Passenger Car Association.
It’s also worth noting here traditional automakers are facing the challenge of selling off their older inventory of diesel- and gas-powered vehicles before stricter national emissions standards come into effect in July, which will make it harder to sell these vehicles.
To remain competitive in the market, carmakers are taking drastic measures by not just offering steep discounts but also providing incentives such as giveaways at dealerships after China phased out its nationwide subsidies for EVs at the end of last year.
So far this year, more than 40 carmakers in China have discounted both electric and gas-powered vehicles. These discounts vary from several hundred dollars for more affordable models to tens of thousands of dollars for higher-end offerings.According to data compiled by China Auto Market, approximately 20% of the available passenger cars witnessed price reductions exceeding 10,000 yuan ($1,500) in the country during the first quarter of 2023.
Automakers Join Tesla-Fueled Price War
Amid a bleak vehicle demand outlook in China due to economic worries, Tesla cut prices of its models last October, reversing a string of price hikes over the past two years. Prices of Models 3 and Y were cut by around 10% in October. And just in less than three months, TSLA again slashed prices of Models 3 and Y in January 2023 by as much as 13.5%.
Tesla's decision to deepen discounts in China for the second time in January came after a drop in December deliveries of its locally produced vehicles, marking the lowest figures in five months. Additionally, the end of Beijing's subsidy program, which played a crucial role in spurring EV sales in China, resulted in Tesla slashing its sticker prices to boost sales and eventually fueling a price war in the country.
Tesla’s steep price reductions prompted other automakers to follow suit amid cut-throat competition. China’s EV maker XPengreduced prices for its G3i SUV, P5 sedan, and P7 sedan models by as much as 13% in January. In a statement to InsideEVs, XPeng cited “The move will increase the competitiveness of our current products, allowing a broader spectrum of users to experience the intelligent features, and creating a more favorable momentum ahead of our new product launches.”
XPeng’s close peer NIO also started offering discounts of up to 100,000 yuan ($14,900) on some models to boost sales. Per local media reports, NIO started slashing prices of the 2022 ES6, ES7 and ES8 in February.
Shenzhen-based BYD implemented its first major price reduction of 2023 in February. Specifically, the company reduced the price of its 2021 Han EV model by 20,000 RMB in Beijing, while the 2021 Qin EV experienced a price cut of 15,000 RMB. The discount rate for newer models ranges from 6,000 to 8,000 RMB.
Legacy automakers like Ford and Volkswagen, BMW AG and Toyota among others also joined the EV price war bandwagon in China. In response to Tesla’s price cuts in October, Ford reduced the prices of the Mustang Mach-E in China by up to 28,000 yuan at the end of October. In March, the company again slashed the prices of the model in China by a substantial 40,000 yuan.
In a bid to attract price-sensitive customers to its offerings, Germany-based carmaker Volkswagen slashed the prices of its ID series EVs in China last month. The carmaker’s two ventures in China, FAW-Volkswagen and SAIC-Volkswagen, offered discounts of up to 20%, or 40,000 yuan on battery-powered sport-utility vehicles (SUVs). Close peer BMW is also offering substantial discounts on its i3 EV, which can result in savings of up to 100,000 yuan. Precisely, the auto biggie is offering 30% discount on its i3's sticker price of 353,900 yuan.
Japan’s top automaker Toyota cut prices of its bZ4X electric SUV in China by 30,000 RMB in February. After the 15% price cut, the Toyota bZ4X starts at 169,800 RMB ($24,660).
“The severity of this cycle of price cuts is something that I’ve never seen,” said Tu Le, a managing director at the Beijing consultancy Sino Auto Insights.
A Shakeout in the Cards?
The intense price war by companies to secure market share is causing significant disruption in China’s auto market. The China Association of Automobile Manufactures doesn’t view this price-cutting spree as a long-term fix to ebbing sales and accumulation of inventory. Many industry watchdogs are of the view that this intensifying EV price war that the situation may result in will wipe out financially weaker automakers and/or lead to potential partnerships and consolidations among Tesla's competitors.
In order to maintain sales volumes, EV makers are feeling the pressure to reduce prices but can they really afford it? Most of the EV upstarts are struggling financially and are not profitable yet. Such price cuts may further clip margins. While some companies may suffer reduced profit margins, others will likely accept greater losses to sustain their sales figures. While big EV makers like Tesla and BYD can afford to get aggressive with price reductions, smaller and not so financially sound rivals may find it difficult to keep up with this price war.
Wall Street predicts that the market will experience a "survival-of-the-fittest" shakeout, with only a few dominant electric vehicle players remaining, while weaker brands fade away.
Who is Benefitting From This Price War?
It is not the carmakers who are reaping the benefits of this price war. As Tesla is set to report earnings tomorrow, analysts are expecting the company’s margins to shrink amid price cuts. The price war is taking its toll on even the most resilient of EV makers. Lest we forget, BYD suffered an $18 billion wipeout in value in February amid the Tesla-ignited EV price war.
With near-term prospects of such strong companies getting muted, we can’t expect the relatively smaller EV players to tackle the current scenario well. It is also difficult for legacy automakers like Ford, whose EV business is still not profitable.
What’s worse is that the EV price war hasn’t ended yet. In fact, more price cuts by EV makers are expected in China as the competition is even more cut-throat now. Per Fitch Rating, the price war in China's car market is likely to extend into the second quarter and erode profitability along the entire automobile value chain in 2023.
At this crucial point, if anyone is on the winning side, it’s the consumers. As a potential EV buyer in 2023, it is you who can benefit from the price war in the face of increasing competition among automakers as more EVs enter the market. With the market already featuring a vast selection of brands and more than 150 new electric cars and plug-in hybrids set to be launched in 2023, consumers will be spoilt for choices, and that too at much more affordable sticker prices.
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