BYD unleashes an EV industry reckoning that alarms Beijing

BEIJING – The price war engulfing China’s electric vehicle (EV) industry has sent share prices tumbling and prompted an unusual level of intervention from Beijing. The shake-out may just be getting started.

For all of the Chinese government’s efforts to prevent price cuts by market leader BYD from turning into a vicious spiral, analysts say a combination of weaker demand and extreme overcapacity will slice into profits at the strongest brands and force feebler competitors to fold. Even after the number of EV makers started shrinking for the first time in 2024, the industry is still using less than half of its production capacity.

The Chinese authorities are trying to minimise the fallout, chiding the sector for “rat race competition” and summoning heads of major brands to Beijing last week. Yet, previous attempts to intervene have had little success. For the short term at least, investors are betting few automakers will escape unscathed: BYD, arguably the biggest winner from industry consolidation, has lost US$21.5 billion (S$27.6 billion) in market value since its shares peaked in late May.

“What you’re seeing in China is disturbing, because there’s a lack of demand and extreme price cutting,” said Mr John Murphy, a senior automotive analyst at Bank of America. Eventually there will be “massive consolidation” to soak up the excess capacity, he added.

For automakers, relentless discounting erodes profit margins, undermines brand value and forces even well-capitalised companies into unsustainable financial positions. Low-priced and low-quality products can seriously damage the international reputation of “Made in China” cars, the People’s Daily, an outlet controlled by the Communist Party, said. And that knock would come just as models from BYD to Geely, Zeekr and Xpeng start to collect accolades on the world stage.

For consumers, price drops may seem beneficial, but they mask deeper risks. Unpredictable pricing discourages long-term trust – already people are complaining on China’s social media, wondering why they should buy a car now when it may be cheaper next week – while there is a chance that automakers, as they cut costs to stay afloat, may reduce investment in quality, safety and after-sales service.

Auto chief executives were told last week they must “self-regulate” and should not sell cars below cost or offer unreasonable price cuts, according to people familiar with the matter. The issue of zero-mileage cars also came up – where vehicles with no distance on their odometers are sold by dealers into the second-hand market, seen widely as a way for automakers to artificially inflate sales and clear inventory.

Chinese automakers have been discounting a lot more aggressively than their foreign counterparts.

Mr Murphy said US automakers should just get out. “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.”

Others leave no room for doubt that BYD, China’s No. 1 selling car brand, is the culprit.

“It’s obvious to everyone that the biggest player is doing this,” said Mr Jochen Siebert, managing director at auto consultancy JSC Automotive. “They want a monopoly where everybody else gives up.”

BYD’s aggressive tactics are raising concerns over the potential dumping of cars, dealership management issues and “squeezing out suppliers”, he added.

The pricing turmoil is also unfolding against a backdrop of significant overcapacity. The average production utilisation rate in China’s automotive industry was a mere 49.5 per cent in 2024, data compiled by Shanghai-based Gasgoo Automotive Research Institute shows.

An April report by AlixPartners, meanwhile, highlights the intense competition that is starting to emerge among new energy vehicle (NEV) makers, or companies that produce pure battery cars and plug-in hybrids. In 2024, the market saw its first ever consolidation among NEV-dedicated brands, with 16 exiting and 13 launching.

Jiyue Auto shows how quickly things can change. A little over a year after launching its first car, the automaker jointly backed by big names Zhejiang Geely Holding Group and technology giant Baidu, began to scale down production and seek fresh funds.

It is a dilemma for all carmakers, but especially smaller ones. “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 said. He added that China’s low capacity utilisation rate, which is “fundamentally fuelling” the competition, is now under even more pressure from export uncertainties. 

While the push to find an outlet for excess production is thrusting more Chinese brands to export, international markets can offer only some relief.

“The US market is completely closed, and Japan and Korea may close very soon if they see an invasion of Chinese carmakers,” Mr Siebert said. “Russia, which was the biggest export market last year, is now becoming very difficult. I also don’t see South-east Asia as an opportunity any more.”

The pressure of cost-cutting has also led analysts to express concern over supply chain finance risks.

A price cut demand by BYD to one of its suppliers late in 2024 attracted scrutiny around how the car giant may be using supply chain financing to mask its ballooning debt. A report by accounting consultancy GMT Research put BYD’s true net debt at closer to 323 billion yuan (S$57.7 billion), compared with the 27.7 billion yuan officially on its books as at the end of June 2024.

The pain is also bleeding into China’s dealership network. Dealership groups in two provinces have gone out of business since April; both of them were selling BYD cars.

Beijing’s meeting with automakers last week wasn’t the first attempt at a ceasefire. Two years ago, in mid 2023, 16 major automakers, including Tesla, BYD and Geely signed a pact, witnessed by the China Association of Automobile Manufacturers (CAAM), to avoid “abnormal pricing”. 

Within days though, CAAM deleted one of the four commitments, saying that a reference to pricing in the pledge was inappropriate and in breach of a principle enshrined in the nation’s antitrust laws. BLOOMBERG