Tesla's price war reshuffles Chinese market, may wipe out some automakers

Tesla Inc. triggered a price war in China that’s poised to reshape the world’s biggest car market, with hefty discounts threatening to drive some automakers out of business.

In October, the U.S. electric-vehicle maker — a major player in hyper-competitive China — cut prices on models produced at an enormous factory on the outskirts of Shanghai. The cuts escalated in January, with another discount that left Tesla’s locally-made vehicles up to 14 percent cheaper than last year, and in some cases almost 50 percent less expensive than in the U.S. and Europe.

The moves left rivals with little option but to follow suit. Among them were local EV upstarts such as Xpeng Inc. and Nio Inc. as well as leading international brands like Volkswagen Group and Mercedes-Benz Group, which offered discounts of up to 70,000 yuan ($10,000). Ford Motor Co.’s Mach-E electric crossover is down to a starting price of 209,900 yuan, about a third cheaper than in the U.S.

“Tesla created havoc for rest of the market,” said Jochen Siebert, managing director of JSC Automotive, a consultancy with offices in Shanghai and Stuttgart.

At least 30 more carmakers have cut prices, according to calculations by Bloomberg News and local media.

The China Association of Automobile Manufacturers called for an end to the price war on Wednesday, saying that it wasn’t a long-term solution to a slowdown in sales and accumulation of inventory. The industry should “return to normal operation” to ensure its healthy development, the group said.

Chinese state media has also weighed in, with commentaries earlier this week saying it was improper for regional governments to offer subsidies on vehicles produced locally. In one example, Hubei province and state-backed carmaker Dongfeng Motor Group Co. lowered prices by as much as 90,000 yuan — or almost 40 percent — on Citroen C6 models.  

The cuts come amid a difficult period for China’s auto industry. Consumer spending was badly dented by the country’s long-running COVID restrictions, while sales were also impacted by the removal of government subsidies on EV purchases at the end of last year. Supply-chain disruptions have hurt the auto industry globally, too.

Even with those challenges and a slower economy, retail sales of new energy vehicles — including fully electric and plug-in hybrids — almost doubled to 5.67 million in China last year. Local giant BYD Co. accounted for around 30 percent of those. Tesla shipped a monthly record of over 100,000 EVs from Shanghai in November.

With the increasing adoption of EVs, China’s auto market is going through a “a very profound reshuffle,” Nio Chief Financial Officer Steven Feng told Bloomberg Television on Wednesday.

“We need to go through this price war at the beginning of the year, and then we expect the industry to go through some profound fundamental consolidation,” he said. “It’s almost consensus that China now has too many automakers.”

Customers are becoming more selective and demand is strong, Feng said, adding that Nio is confident of meeting its target of a quarter-million EV sales this year, more than double its 2022 total. Tesla’s head of production Tom Zhu has said the company’s price cuts “generated huge demand.”

According to Bloomberg New Energy Finance, EV sales could reach 8.1 million units in China this year, compared with 3.2 million in Europe and 1.9 million estimated for the US.

There are few signs of a let up in competition, with 155 new pure electric and plug-in hybrid models expected to be unveiled in China this year alone, according to Sanford C. Bernstein & Co.

That means more price reductions could come from financially stronger bigger automakers.

Tesla has “several billion dollars that they can use for this purpose while others don’t,” JSC Automotive’s Siebert said.

In addition to Tesla, BYD is capable of carrying out another round of cuts, Morgan Stanley analysts including Tim Hsiao and Cindy Huang wrote in a March 19 note. The price war initiated by the Austin, Texas-based company came on faster and more severely than expected and will “expedite a market reshuffle,” they said.

The Chinese trio of Nio, Xpeng and Li Auto Inc. also have strong enough balance sheets to stay self-financed over the next 18 months, according to Morgan Stanley.

“The price cuts on EVs make them even more attractive compared to gasoline cars, further squeezing traditional carmakers,” Yang Jing, director of China Corporate Research at Fitch Ratings, said in an interview. Separately, in a March 16 note, she said companies without sound external funding may face “survival challenges” in the coming two years.

The reaction in markets has been mixed. Tesla shares dropped immediately after the company’s pricing shifts, but they’re on the up again and far outperform major Chinese EV makers. Tesla shares have rallied 60 percent this year, while Li Auto’s US depositary receipts have added 15 percent. Nio is down 7 percent in Hong Kong.  

“It’s going to stay brutal through mid-2024,” said Tu Le, managing director of consultancy Sino Auto Insights. “It’s really existential for some of the weaker players.”