How should we view Tesla’s price cuts in China?

At the end of 2022, the five-year new energy vehicle (NEV) government subsidy was officially withdrawn. Upon the phase-out of this incentive, some OEMs enacted price increases, there being the double impact of subsidy withdrawal increasing vehicle cost, and core plug-in vehicle component prices continuing to rise. According to the latest information, the current lithium carbonate price per ton has exceeded CNY500k, which directly increases cost pressure on any vehicle that has a large battery pack – battery electric vehicles (BEVs) and, to a lesser extent, plug-in hybrids (PHEVs). Despite this, at the beginning of 2023, Tesla suddenly announced that its Model 3 and Model Y prices would be reduced, only three months after the last price adjustment. The price of the Model 3 RWD version is now less than CNY250k, which is almost a 13% reduction.

From January to November 2022, according to wholesales data, there were 235,728 units of Model 3 sold and 419,341 units of Model Y. However, only 47% and 68% respectively were delivered in China (as seen in the chart below). Weakening growth in China and fewer local orders have prompted the Tesla price reduction.

Turning to domestic OEMs, BYD announced an increase in sales prices of its models, and many other brands including Volkswagen, BMW, Chery, Changan, and Xpeng followed suit. BYD has increased its vehicle prices by CNY2k to CNY20k, but as we know, most other NEV brands are still losing money. According to 2022 Q3 financial reports, the traditional OEMs with high net profit rates can maintain cash flow via ICE sales but NEV brands, apart from BYD and Tesla, currently operate at a loss. Although their gross margins are close, the difference between Tesla and BYD in net profit is four times (in Tesla’s favour). It means Tesla has an absolute advantage in the price war.

Tesla will avoid direct price competition which could break its control of the market. At the same time, we can see that in the last round of competition, domestic OEMs are already in the lead. Tesla would like to get more orders as a result of its price realignment, but how long this can last is unknown. Domestic OEMs have accumulated much experience in product control, but how to better apply this in future product planning and strategy is a major problem. Excellence in key new technologies will be critical, and that’s the reason most domestic OEMs prefer to focus on developing and investing in advanced functions on their vehicles. Developing what is seen as missing in Tesla’s cars could help them attract more consumers.

In addition to the impact on the NEV sector, the impact on the ICE segment is significant. In the price range from CNY250k to CNY350k, NEV penetration is 36%, most of which is contributed by Tesla. At the same time, NEV penetration in the CNY200k to CNY250k segment is only 22.4%. With the price of Tesla’s Model 3 now below CNY250k, we see scope for the phase-out of ICE to be accelerated, a result of Tesla’s advantage in the price war.