The China EV price war has reached a fever pitch — kicked off by Tesla — with the mass market the new battlefront in the world's largest and fastest-growing market for electric vehicles.
Chinese EV and battery giant BYD is the mass-market juggernaut, but Tesla has thundered into this segment after slashing prices, threatening EV startups like XPeng and scores of domestic players jostling for position.
Even premium EV makers Nio and Li Auto eye mass-market forays, with an idea to increase volumes with more affordable models and quicken their quest for profits.
The world's largest EV market is set to grow even more competitive, spilling over into Europe and the rest of Asia, as China exports excess supply into those regions. China's price war will hit profit margins for some EV makers while others accept deeper losses to maintain sales. Ultimately, Wall Street expects a survival-of-the-fittest shakeout, leaving a few dominant China EV players while weaker brands fade away.
Tesla stock has been a big winner in 2023, but has been pulling back as the initial demand burst from global price cuts quickly wanes. BYD stock and Li Auto are up modestly this year, but well off early February highs. Nio stock and XPeng are down in 2023, not far from long-term or all-time lows.
For now, Tesla — the only non-Chinese EV maker to gain a real foothold to date — risks losing its grip on China as new brands and models flood the mass market. This is also a put-up-or-shut-up moment for foreign automakers like General Motors, Ford, Toyota Motor and Volkswagen. Their electric vehicle launches have been coolly received by China's mostly young EV buyers. Yet the companies' China EV offensive is just getting started.
By 2025, GM plans to roll out more than 15 EV models in China. Many of those next-gen, Ultium-branded EVs are likely to tap the mass market — the hotbed of activity in 2022.
"As the China EV market grew, this is where most of the growth and most of the competitiveness started to really accelerate," said Deutsche Bank analyst Edison Yu. "The issue here is that as the mass market grew, it just didn't grow fast enough to absorb all the competition. BYD crushed everybody here."
Tesla Price Cuts Trigger China EV Price War
The mass-market competition has become even more cutthroat with the most recent Tesla price cuts.
In early January, Tesla slashed Model 3 and Model Y prices in China by 6% to 13.5%, after already cutting prices last October. Ten days later, XPeng responded by cutting EV prices by 10%-13%, with several others quickly following. Nio reduced some prices in early February and even BYD joined the price-cutting bandwagon in late February and again in early March. Several foreign automakers have cut EV prices or offered big incentives, including Ford, Toyota and, just this past weekend, Volkswagen for its ID family of electric cars.
Meanwhile, automakers have been slashing prices of traditional gas-burning vehicles, adding to the pressure on EVs.
Tesla's price cuts made the Model 3 and Model Y more competitive vs. the BYD Han and Seal sedans and Tang SUV, as well as EVs from XPeng, Nio and more.
Sizing The China EV Mass Market
The low end of China's EV market — small and cheap electric cars priced below 100,000 renminbi (RMB), or around $15,000 — is already highly electrified, with "mini city cars" like the bestselling GM-Wuling Hongguang EV costing as little as $5,000.
The market for premium and luxury cars above 300,000 RMB ($44,000), commanded by Nio, Li Auto, Audi, BMW and Mercedes-Benz, has been slow to electrify.
But EVs and plug-ins made big inroads last year into the mainstream market of roughly 100,000 RMB to 300,000 RMB.
Yu estimates that at least 40% of the 6.5 million "new energy vehicles" (NEVs) sold in 2022 fell into the mass market. NEVs include all-electric, plug-in hybrid and fuel-cell vehicles.
Selected New China EV Models Planned In 2023
| EV maker | Model | Vehicle type | Expected price | Expected launch |
|---|---|---|---|---|
| BYD | Seagull | EV small car | 65,800-112,800 RMB ($9,450-$16,200) | Spring 2023 |
| BYD | Sea Lion | EV crossover SUV | 200,000-250,000 RMB ($28,770-$35,960) | Q2 2023 |
| Denza (BYD) | N7 | Mid-size SUV, hybrid and BEV variants | Starting price near 400,000 RMB | Q2 2023 |
| Denza (BYD) | N8 | Large SUV, likely hybrid and BEV variants | TBD | Q2 2023 |
| Li Auto | L6 | Mid-size hybrid SUV | 200,000-300,000 RMB | To be disclosed |
| Li Auto | L5 | Non-SUV hybrid | 200,000-300,000 RMB | To be disclosed |
| Nio | ES5 | BEV "station wagon" | TBD | To be disclosed |
| Nio | EC7 | BEV SUV coupe | starts at 488,000 RMB with battery or 418,000 RMB with BaaS (Battery as a Service) | May 2023 |
| XPeng | G7 | BEV SUV coupe | 200,000-250,000 RMB | To be disclosed |
| Galaxy (Geely) | L7 | Hybrid SUV | 200,000 RMB | Q2 2023 |
More affordable new models are on their way, likely drawing out the China EV price war.
The premium-focused startup Li Auto has the Li L5 EV and L6 SUV due, both priced within 300,000 RMB. Li also has cheaper trim "Air" versions of the premium L7 and L8 electric SUVs coming in April.
Premium peer Nio's new ET5 sedan should hit its stride after launching last September. It's Nio's cheapest model and a Model 3 rival. Another new model, possibly called the ES5, could become Nio's cheapest SUV. It's seen as a Model Y competitor.
The ET5 starts not much above 300,000 RMB, with the ES5 likely to have a similar price. Once Nio starts producing those models full-bore, prices could fall further.
By this summer, Nio is expected to offer a total of eight all-new or refreshed models, after doubling its lineup to six last year. In 2024, Nio is set to launch a new mass-market brand with prices between 200,000 and 300,000 RMB ($29,000 to $44,000).
Fellow startup XPeng, already a mass-market player, should launch the G7 SUV and an electric minivan soon, along with a revamped P7 sedan.
In 2023, Yu expects Li's L7 and XPeng's G7 to be critical to those startups' success.
He lauds Li Auto for doing "a very good job of ramping up production when the product is fresh." As for Nio, he expects the ET5 to matter, but more important is the "speed at which they can reliably launch new models" after a string of execution and supply-chain issues last year.
BYD will launch more than a dozen new or revamped models in 2023, from the low end to the super-premium, including at least two EVs targeting the Model Y.
Chinese auto giant Geely, parent of Volvo and Polestar, is another notable player. Its brand-new Galaxy brand is likely to offer seven new mass-market EV models by 2025, including two plug-in hybrid EVs due in the next few months. In addition, Geely's expanding Zeekr brand taps the lower end of the premium EV market.
Expect a wave of new EV unveilings and launches at the Shanghai Auto Show in April.
With these EV makers and more releasing so many new models amid heavy overall production, standing out will be hard. The XPeng G9 SUV has had lackluster sales since its late 2022 debut. Many EV sedans and crossovers could face the same issue in the coming year.
But the alternative is to keep selling aging vehicles at massive discounts.
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Will China EV Sales Slow?
Amid macro headwinds and an end to subsidies, NEV sales will rise 31% after more than doubling in 2021 and 2022, the China Passenger Car Association forecasts. That would amount to 36% of all vehicle sales, CPCA estimates, vs. about 28% in 2022. By 2030, NEVs could account for 70%-90% of China's market, according to the country's automakers.
In absolute numbers, sales of EVs, plug-in hybrids and fuel-cell vehicles in China are expected to increase by roughly 2 million vehicles in 2023 to 8.5 million.
In 2022, restrictions due to Covid-19 throttled China's economy, and EV makers faced significant supply-chain issues or outright shutdowns. Yet the U.S.-listed Chinese EV startups Li Auto, Nio, and XPeng each managed to grow sales by double digits, despite missing delivery guidance for the year.
The runaway leader in the mass market is BYD, which tripled its NEV sales last year, including hybrids, to 1.86 million units. It made up almost 30% of NEV sales last year.
Tesla's global deliveries rose 40% to 1.31 million units for 2022. That was roughly 30% less than BYD's tally, but Tesla still leads in battery electric vehicles.
Tesla China grew sales 37% to 439,770 units last year, CPCA data showed. The company expanded Shanghai capacity last summer but has had to slow or halt output multiple times in recent months, despite Tesla's big price cuts.
China EV Sales Plans Vs. Demand
BYD is targeting 2023 NEV sales of 4 million vehicles, more than double 2022 sales. That alone would roughly account for all of this year's projected NEV increase, even including sizable exports.
Li Auto, Nio, GM, Toyota and many others are planning to ramp production as well.
The bottom line is that China EV output and production capacity is set to soar in 2023, while demand will lag far behind. This imperative to move the metal is why a China EV price war is underway and likely to get worse.
For BYD and the Chinese startups, rising exports may help offset the domestic slowdown. They are moving into Europe and other overseas markets.
Exporting excess EV output will boost competition in those places as well, adding to margin pressures.
China EV Manufacturing Strengths
In the worldwide EV race, China benefited from its mastery of mass manufacturing goods like smartphones and laptops. Its dominance and localization of the EV battery supply chain provided another critical edge.
"An EV is just way easier to make than a gasoline car," said Deutsche Bank analyst Edison Yu. "It's a very complicated, big computer almost."
China cracked that technique because of its expertise in electronics, Yu adds. Then all it needed to do was get "the software, quality and branding right."
Chinese automakers have come a long way. Just a decade ago, even Warren Buffett-backed BYD was synonymous with poorly built, noisy, unreliable Chinese cars.
Market Shifts Amid China EV Price War
BYD, the mass-market leader, has benefited from a raft of new models as well as a consumption downshift as China's economy slows. It's not just China's EV leader, it's now the country's largest automaker.
Unlike many EV peers, BYD is profitable. Wall Street expects the company to report a nearly fivefold jump in 2022 profits as sales growth swells more than 80%.
Most BYD models are priced between 100,000 RMB and 200,000 RMB (roughly $15,000-$29,000). They are seen as value offerings.
With newer models like the Seal and Frigate, BYD has pushed further into "affordable luxury." And with its aggressively expanding Denza brand, BYD is shooting for the premium market. BYD also has unveiled a super-premium brand, Yangwang, with a heavy-duty SUV likely to launch in the third quarter. Yet another "F Brand" is set to launch between Denza and Yangwang.
Tesla once dominated China's premium EV segment.
But with its big price cuts, "Tesla has pulled itself from the premium into the mass market," said Tu Le, of Sino Auto Insights, an advisory company.
The Model 3, which sold for nearly $10,000 more than the BYD Seal last fall, came down to just $600 more after early January. In early March, BYD offered new Seal discounts.
But he warns of "extremely intense" competition in the sub-300,000 RMB segment. BYD has extended its dominance there while XPeng is struggling for air.
In late February, BYD dealers cut prices on several models, showing that not even China's EV king is immune to the price wars.
BYD EV Production Edge
In the mass market, Le considers BYD "head and shoulders above" the competition.
He rattled off the reasons: "BYD has been around for a long time. They've been in the market since 2003. They're a national champion. They're Chinese."
Le added that BYD's "products have gotten a lot better and they're affordable. They have products in almost every market segment. Their quality, reliability and design have improved significantly over the last seven years. They have the trust of the Chinese consumer."
There's more to its leadership. "BYD has scale, and they build their own batteries and they build their own chips," Le explained. "So they can manage their costs much more efficiently than any company that's less than 10 years old."
BYD has continued to invest massively in new EV and battery plants.
As competition rises at home, BYD is making a huge export push, expanding across Asia, Europe and Latin America.
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BYD Vs. Tesla
In the brewing Tesla vs. BYD battle, who will rule in the next three to five years?
"They can both grow together" in China's rapidly growing market for mass-market EVs, Le said. But he's "a little more suspect" about Tesla because of its dated products.
"If Tesla were to refresh the Model 3 and the Model Y in a significant way, especially if they didn't increase the price, you would definitely see a boost in sales," Le added.
A redesigned Model 3 reportedly is on its way, but when will it arrive? At its March 1 investor day, Tesla disappointed by neither confirming the long-awaited Model 3 refresh nor unveiling a next-gen, lower-cost EV, the long-rumored Tesla Model 2.
Tesla's price cuts globally are supporting delivery volumes at the expense of its prized profit margins.
Price cuts goose demand for only a couple months or so, Le warns. "Tesla will need to do it again, and they will before the year is out," he said.
The Tesla Shanghai plant has been the EV giant's export engine. But the rise of Tesla Berlin reduces the need to export made-in-Shanghai cars to Europe.
Shanghai already has spare capacity, a problem that could continue to grow. Tesla has a strong incentive to keep Shanghai exports high, despite the risk of further price cuts in those destinations. Even with fresh discounts in Europe, Tesla prices there are significantly higher than in China.
As for unprofitable EV startups XPeng and Nio, their price cuts and discounts following Tesla's price cuts raise the risk of widening losses. That puts them at a disadvantage as investors hunt for the best EV stocks.
For Nio, its looming mass-market entry could drag out the timeline to profitability.
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China EV Price War Will Shake Out Industry
With an EV price war now underway, Deutsche Bank's Yu expects an industry shakeout.
The startups could be vulnerable. Nio and Li Auto have enough funding through 2024, Yu told IBD, while Li Auto is slightly profitable. But XPeng could be in trouble if it doesn't "turn the ship around" by 2024-25.
"By the end of 2024, I do think we'll get some sort of consolidation, and some people going away, and that will be either because they just failed operationally or because they have run out of money. Until then, we're going to get very intense competition, increasingly from the Big Tech companies like Baidu and Xiaomi."
Search engine giant Baidu, which has invested heavily in self-driving cars, will roll out a highly autonomous EV via a Jidu joint venture with Geely. Chinese handset giant Xiaomi plans to launch in early 2024.
More generally, Bain & Co. partner Ping Yi forecasts a widening gap between winners and losers as China's EV market slows.
"New brands that have low brand awareness and vague brand positioning will struggle to survive," Yi said. "It's also very challenging for brands targeting high-end and premium markets without strong brand equity."
Chinese battery giant CATL reportedly will offer some discounts to key customers such as Nio but not major client Tesla. That could help startups survive China's EV price war.
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Foreign Automakers In China EV Market
As for Western and Japanese OEMs, Sina Auto Insights' Le declares that they missed the boat on China's EV transition, while its combustion car market shrinks.
Even with its ID family of EVs, Volkswagen "brought a knife to a gunfight," he said, dismissing the vehicles' lackluster features, range and connectivity.
Toyota and Nissan also have slashed EV prices in China. Ford recently announced big discounts to clear out Mustang Mach-e inventory before a refreshed model is released.
For the traditional carmakers, much depends on how fast they can transform into innovative, technology-driven and direct-to-customer EV players, industry experts say.
"Competition caught up to the foreign OEMs, and the domestic players are now doing better than they are," Le said.
Toyota is just rolling out the bZ3, a small EV sedan for the China market, that starts around 169,800 RMB ($24,500). It uses BYD motors and batteries, in what could be the start of a major EV collaboration between the auto giants.
How Long Will China EV Price War Last?
The China EV price war shows no signs of slowing down.
Many EV makers' big production plans face a harsh reality. Attractive new EVs may not catch fire, while aging models risk rapid deterioration.
EV makers are likely to keep cutting prices. Ultimately, a few survivors may emerge stronger, but even they will face a bloody, bruising battle for the foreseeable future.
Exports offer an escape valve. But that can spread the problem overseas. Tesla is already discounting European prices again. BYD and other Chinese EV makers will ramp up overall competition in Europe and Asia.
Foreign OEMs already were struggling to gain inroads in China's EV market. Now they risk being locked out of the world's largest auto market. Meanwhile, battle-tested Chinese EVs are set to become much bigger players in Europe.
The U.S. market, however, should remain relatively insulated in the short run, given tariffs and EV tax credit rules. Aside from Geely brands such as Polestar, China EV makers don't have a real U.S. presence yet.
