Chinese Price War Threatens BYD’s Market Dominance

Echoes of the current Chinese price war, launched expressly to inflict pain on western producers, are rippling through the automotive industry, and BYD, the price leader, is beginning to feel the strain.

This development amplifies concerns of an inundation of cheaper Chinese automobiles flooding Western markets.

BYD, short for Build Your Dreams, likely faced a sobering moment in its boardroom. Mere months after unseating Volkswagen as the best-selling automaker in China, the ambitious Chinese automaker faced its first setback this Monday.

Despite a slight increase in profit (10% to $631 million) and revenue (4%) in the first quarter of this year, BYD’s performance fell significantly short of analyst expectations.

The cause of this disappointment is apparent. In a bid to protect its recently acquired market share in China, BYD aggressively slashed prices across its entire range.

The entry-level model, the compact electric Seagull hatchback, is now available in China for as low as 69,800 yuan (approximately €9,000). Moreover, BYD made substantial investments in the premium and luxury segments, unveiling four new models and a concept for higher-end brands such as Denza, Yangwang, and Fang Cheng Bao at the Beijing Auto Show.

The repercussions of the price war in China are reverberating throughout the entire production chain.

Established Western automakers like Volkswagen and Tesla, the instigator of last year’s price war, are visibly losing market share and are compelled to further lower their prices or introduce new technological innovations.

Elon Musk’s Tesla, for instance, received approval on Monday to roll out its self-driving Autopilot feature across China.

Perhaps the most affected parties are the numerous Chinese suppliers of auto parts, including BYD itself.

Whereas the Chinese automotive giant previously secured supply contracts for two to three years, it now only commits to six-month agreements. Compounding this issue is BYD’s strategy of aggressively securing market share domestically with discounts while simultaneously increasing its focus on exporting more profitable electric vehicles to Europe and the US. Last year witnessed a staggering 153% surge in BYD’s exports, reaching nearly 100,000 vehicles.

In the looming ‘tsunami’ of electric vehicles from China threatening to inundate Europe – already causing congestion in ports – BYD could play a pivotal role.

China boasts a theoretical production capacity of 40 million vehicles annually, of which only 22 million are currently sold domestically, according to the Chinese consultancy firm Automobility. Hence, the 100,000 BYD exports represent just the tip of the iceberg.

The colossal overcapacity in China, partly fueled by state support, is likely to have far-reaching consequences. To counteract unfair competition, Europe is considering increasing import tariffs on Chinese electric vehicles by 15 to 30 percent. However, according to consultancy firm Rhodium Group, as cited in The Financial Times, this may not be sufficient.

To prevent Chinese electric cars from decimating pricier European automakers, a tariff of “at least 50 percent” is deemed necessary. Such a move would undoubtedly inflict significant pain on BYD.

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