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Tesla EV Peer BYD Cut Prices Again. Chinese Demand Isn’t a Problem.

Tesla,
the global leader in battery-electric vehicles, cut prices in the first quarter. Now
BYD,
the EV leader in China, is doing the same in the second quarter. That makes investors nervous, but there is logic bethind the car makers’ moves.

Thursday, Citi analyst Jeff Chung pointed out that BYD (ticker: 1211.Hong Kong) has cut prices on its Han plug-in hybrid vehicles. It’s the second cut in the past “210 hours,” wrote Chung.

About a week ago, BYD also cut prices for its Seal battery-electric vehicle. Cuts, depending on the version, ranged from roughly 3% to 10%. The Seal now starts at about $28,000. A Tesla (TSLA) Model 3 in China starts at about $34,000.

Price cuts can signal trouble in a market, but there doesn’t appear to be an issue with demand. For the year to date through the end of April, new-energy vehicle sales in China, which includes both battery-electric and plug-in hybrid vehicles, rose 43% year over year to 2.1 million units, according to China Passenger Car Association data. During that time, battery-electric-vehicle sales rose 29% to 1.5 million units, and plug-in hybrid sales rose 100% to 600,000 units.

Those numbers might be a little inflated. Chung, in a separate report, wrote that auto makers likely included some early May sales in April numbers. Still, he is expecting a strong year for EV sales in China, with unit sales up roughly 30% year over year.

Instead of reacting to changes in demand, BYD might just might be feeling pressure to match Tesla’s price cuts, which accelerated in January. BYD didn’t immediately respond to a request for comment about pricing.

Tesla’s price cuts worked. It picked up market share in China in the first quarter, increasing sales volume by almost 30% year over year, faster than the market grew. That share didn’t come at the expense of BYD, though; its first-quarter battery-electric sales rose by 85%.

Cutting prices is a risky way to gain market share. If all companies making a profit drops prices to match, market shares don’t change much, and everyone is worse off—except consumers.

The effect right now is that BYD and Tesla—the only two EV makers globally producing consistent profits—are pressuring Chinese EV peers. Price cuts eat into profits, but the two have more room to cut than others.

“Aggressive price cuts by Tesla was a smart ‘rip the band-aid off moment’ for Musk & Co. to defend its EV turf and put an iron fence around its consumer installed base,” wrote Wedbush analyst Dan Ives in a Thursday report. The same logic applies to BYD.

“Price cuts come at a price, and this tug of war between volumes and margins is now the big debate on the Street heading into earnings and the rest of 2023,” Ives wrote. He rates Tesla shares at Buy and has a target of $215 for the price.

Investors were shaken by Tesla’s first-quarter profit margins following its cuts. Tesla reported first-quarter operating-profit margin of about 11%, down from about 19% a year ago. Shares fell almost 10% in response.

Tesla stock was up 0.8% in late trading Thursday at $175.25. The
S&P 500
and
Nasdaq Composite
were up 0.4% and 0.9%, respectively. BYD’s American depositary receipts slipped 0.4%.

BYD’s Hong Kong-listed shares rose 1.8% Thursday. The
Hang Seng Index
added 0.9%.

Write to Al Root at [email protected]

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