China’s EV price war is just getting started

This month, prices were cut or incentives offered on more than 40 EV models, amounting to some of the largest reductions in China auto market history. PHOTO: TINGSHU WANG/REUTERS
This month, prices were cut or incentives offered on more than 40 EV models, amounting to some of the largest reductions in China auto market history. PHOTO: TINGSHU WANG/REUTERS

Summary

With a historic round of price cuts this month, Tesla, Li Auto and a host of others have extended China’s monthslong electric-vehicle price war into a new quarter.

With a historic round of price cuts this month, Tesla, Li Auto and a host of others have extended China’s monthslong electric-vehicle price war into a new quarter. Some say the fight is just getting started.

EV makers in the world’s biggest market for electric and hybrid vehicles have been cutting prices en masse since last year, when slowing sales and rising competition from upstarts forced a rethink of the playing field. This month, prices were cut or incentives offered on more than 40 EV models, amounting to some of the largest reductions in China auto market history.

CCB International analyst Qu Ke said he expects “growing and intensified competition" into the third quarter, given the current oversupply and soft consumer sentiment in China. Nomura analyst Joel Ying said the current level of competition could last for two to three years before the market enters a new, stabilized stage, potentially trimming the field to a handful of survivors.

Drivers in the short term include a new batch of models launching this week at the Beijing Auto Show and coming government subsidies for trade-ins that have companies competing to capture an expected uptick in demand. Tesla’s fresh announcement that it plans to roll out cheaper models early next year could add to the pressure.

One likely outcome of prices in free fall is that the popularity of alternative-energy vehicles will continue to rise, cementing their place atop China’s auto market. In the first two weeks of April, retail sales of EVs and plug-in hybrids overtook those of traditional vehicles for the first time, according to China Passenger Car Association data. The International Energy Agency this week estimated that 60% of EVs sold in China are already cheaper than combustion-engine cars. Elsewhere, it expects price parity only by about 2030.

Another outcome is that the smallest players are at greater risk of going under. Lower prices will likely drive “some industry consolidation," said Vincent Sun, a Morningstar equity analyst, citing recent exits of “weaker players."

Qu of CCB said he expects more startup original equipment manufacturers to go bankrupt in the next two to four years.

Margins are also likely to suffer, although on that front the more established players have more room to give. Only three EV makers in China were profitable in 2023: Tesla, BYD and Li Auto. The latter two had enviable gross profit margins of 20% and 22.2%, respectively, while Tesla’s global gross profit margin was 18.2%.

Others, including NIO and XPeng, have growing sales but are spending billions of dollars to catch up to rivals.

“Under such circumstances, some loss-making players are likely to stay burning cash, so financing capability is important to just stay in the game," Sun said. “It’s hard to say when the price war will end but we do expect it will last throughout this year."

XPeng and NIO still have ample liquidity to support their ambitions and potentially withstand withering prices. XPeng said it had the equivalent of $2.92 billion in cash and cash equivalents as of 2023, up 45% from a year earlier, while NIO’s rose 66% to the equivalent of $4.55 billion.

EV makers will have some natural room for price cuts in an environment of declining input costs, such as lower lithium battery prices, and on greater efficiencies, coming via economies of scale and trimmed operating costs, analysts said.

“For those hot names in the market, I think no matter what, they will find a way out," Ying of Nomura said. But for companies that are small, unlisted and with limited shipments, “they will face more challenges ahead."

Write to Jiahui Huang at Jiahui.Huang@wsj.com and Sherry Qin at sherry.qin@wsj.com

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