XTB Analysis, Claudiu Cazacu: China is the battlefield for confrontations between the giants of the automotive sector. Tesla, results far below expectations

Competition in the automotive sector, especially in the electric segment, has intensified strongly this year. The Chinese market, which represents over a third of the global market, but over half of the electric car market, has become a major battleground for the world’s powerful brands, says Claudiu Cazacu, strategy consultant at XTB Romania.

According to estimates by the Nomura financial group, car prices in China have fallen by 19% in the last two years, until spring, a trend that has intensified in the last two quarters, following the actions of the technological giant BYD.

BYD’s price cuts in March, some reaching 30%, sent shockwaves through local and foreign competitors. Some companies have come up with their own response, while others, such as Tesla, have preferred to wait, paying the price through lost sales. The pressure, however, could not be ignored, pushing for action. Tesla recently decided to lower the price of a version of the Model 3 in China by 3.7%.

The war for market share is eating into companies’ profits, as BYD’s recent results show. The company’s second-quarter profit of 6.4 billion yuan ($0.89 billion) was 30% lower than the one reported a year ago in the same period, April-June. Revenue rose 14% to 201 billion yuan. The profit margin of just 3.2% indicates the high level of competition, while over the past 12 months, the net profit margin reaches 4.9%.

It is, however, better than in the case of Mercedes-Benz, with a 2.7% margin in the last quarter, although the value for the past 12 months is a similar one, at 4.9%. Despite all the difficulties, Tesla is doing better globally in terms of profitability margin, with 5.2% quarterly and 6.2% annually. In any case, these figures are a snapshot of the past and are threatened by current trends, emphasizes Claudiu Cazacu.

Customs duties bring orders below expectations for Tesla

Tesla’s launch in India was below expectations: only 600 orders for its models, a result of high customs duties and tensions between the two countries. In California, Tesla’s market share for electric vehicles fell to 52.5%, and sales plunged by 12% compared to the previous year, and this before some lawsuits that could even put a pause on the company’s sales.

Tesla sold 67,886 vehicles made in China in July, down 5.2% from June and 8.4% from July 2024. The Shanghai factory produces the Model 3 sedan and the Model Y. BYD also had a weak July, but returned to growth, albeit marginally, of 0.1% in August compared to the previous year.

For BYD, the increase in sales outside China was the engine of the rise. Very good results were recorded in Europe, while Tesla was on the opposite slope.

In Europe, including the UK and the EFTA countries, Norway, Iceland, Switzerland and Liechtenstein, Tesla sales fell by 40% to 8,837 units in July, while BYD performed spectacularly, with a jump of 225% and sales of 13,503 cars, points out strategy consultant XRB Romania.

Tesla’s rapid slowdown is not only due to the aggressive entry of other brands into the market, but also to the collateral costs of Elon Musk’s public positions. It remains to be seen to what extent the withdrawal from the political front will allow sales to be revived, given the strong competition from Chinese cars, but also the lack of very fresh models. In fact, the European market share of Chinese brands has reached a record 5%, supported by a wide range of new models, fast charging technology and competitive prices despite customs duties.

The Chinese giant, in a strong position in the competition

BYD, ranked 1st in sales in China, has the advantage of having started as a developer of batteries, an essential component of electric vehicles, and of having subsequently produced a wide range of products, from compact class vehicles to luxury cars and even buses. By controlling a large part of the supply chain, the company keeps costs low.

The manufacturer is in a position of relative strength, not only against Tesla, but also against some European or local competitors, but this does not mean that it can avoid some of the financial consequences of its market strategy. Its shares lost 8% in China on Monday, after the announcement of the results. Investors are not showing much patience with the pricing strategy that could, however, bring advantages to the company in the long term.

Since the beginning of the year, the advance has been adjusted to 21.8%. Compared to Tesla, however, the course on the stock market is a major achievement. Reflecting the sales trend and general concerns, Tesla shares have lost 12% this year. The market value of both companies is approaching 1 trillion, but the currency is the dollar for Tesla and the yuan for BYD, meaning that Tesla’s market value is actually more than 7.13 times higher.

Some investors have maintained a high level of confidence in new business lines enthusiastically promoted by CEO Musk: robot taxis, energy storage or humanoid Optimus robots. Public communication seems to want to shift attention from the current serious difficulties in the “classic” car segment to new, profitable directions with growth potential, Claudiu Cazacu shows.

However, current trends raise questions about the core business line, and further compression of margins is expected, compared to the same quarters last year. New, substantial and credible announcements will be needed to restore a sustainable appetite for Tesla shares. Meanwhile, beyond the current volatility, BYD’s profits are expected to grow by almost half next year, anchoring stock market valuations.