Why BYD's Price Cuts Spell "Doom" For Tesla in Both China & Europe

BYD's price cuts don't directly impact Tesla's Model 3 & Y sales, but they negatively affect the profitability of Tesla's upcoming affordable EV in China & FSD.

• BYD’s price cuts have led to at least 5 local EV rivals in China to follow suit by lowering their prices. Despite the blaring headlines about this over the weekend, none of this affects sales of Tesla’s Model 3 and Y in China.

• It does negatively impact the launch of Tesla’s “new” affordable model in China (a stripped-down Model Y), which was set to cost around $24,000 but is now undercut by BYD’s price reductions for its ultra-cheap “smart cars” with its self-driving option for free.

• BYD’s price cuts also harm Tesla’s profitable exports from China: As is clear from Figure 3 below, Tesla’s profits are highly reliant on exports from its Shanghai plant. With lower prices for BYD cars in China, a similar price cut in BYD’s overseas markets could hurt Tesla even more (especially in Europe, where BYD has been outselling Tesla since February).

• Tesla’s dependence on China is now a big risk: In 2024, an estimated 71% of Tesla’s global profits came from its Shanghai factory (which makes huge margins on its exports). Tesla’s China agreement has minimum targets for revenues, employee numbers, and taxes (see details below). While these aren’t a problem now, they could very quickly become troublesome, given the intensifying price wars in China.

• Tesla has little leverage against rivals in terms of profitability: Figure 6 below shows Tesla’s profitability and valuations versus its major global rivals. Given its old model lineup requiring constant discounts to keep selling, it’ll be a matter of time before Tesla burns cash and valuations implode.