Tensions between Tesla and BYD: Price Emerges as the New Success Factor in the EV Market

With the release of Tesla's and BYD's sales figures at the end of each quarter, investors inevitably focus on the manufacturer that has delivered the most electric vehicles to customers. In the three months leading up to the end of June, despite a 5 percent drop in deliveries, Tesla managed to maintain first place. The Elon Musk-controlled company delivered 443,956 vehicles, compared to 426,039 battery-electric vehicles by its Chinese rival. However, evaluating Tesla and BYD purely based on sales volume is becoming an increasingly inadequate measure for assessing stock prices. This is because the raw number of deliveries does not account for other important metrics such as price per unit and margins. The two companies currently compete in different price segments. The entry price of Tesla's cheapest model in China is about $31,900, more than three times higher than the sticker price of BYD's cheapest model, the Seagull, a fully electric hatchback starting at $9,900. Tesla's higher prices enable the company to achieve an operating margin of over 9 percent, compared to 5 percent at BYD. In 2023, Tesla generated approximately $82.4 billion in automotive sales, while BYD reported $66.5 billion. A better conclusion from the recent sales figures is that price is increasingly becoming an important driver for the growth of EV manufacturers. BYD reached a new record in deliveries in the second quarter, shortly after lowering prices for nearly all models at the end of March. A closer look at Tesla's sales reveals that deliveries of the two cheapest models – the Model 3 and the Model Y – were 7 percent higher than expected, while the more expensive models, the Model S, Model X, and the Cybertruck, fell short of market expectations by nearly 30 percent. The importance of a wide price range for future growth is especially crucial as many of the fastest-growing markets for electric vehicles are emerging economies. For instance, EV sales in Thailand, Southeast Asia's second-largest economy, increased sevenfold last year. BYD, which offers electric vehicles in several price ranges, is benefiting from this boom and already holds nearly half of the market share in the country. BYD's price advantage stems from a vertically integrated supply chain, with the company manufacturing its own batteries. This advantage was further strengthened last year as the costs for producing battery cells declined. Increasing exports by BYD, which more than quadrupled last year, are adding pressure on Tesla to expand its portfolio into the lower price segments. In China, which accounts for 60 percent of global EV sales, Tesla's sales were particularly weak in June, with a 24 percent drop in sales of China-made vehicles compared to the previous year. An aging model portfolio and Tesla's lead in software are increasingly being challenged by Chinese rivals like Nio, which offer vehicles with self-driving software and intelligent driving technology. Nio more than doubled its vehicle deliveries in the second quarter. Tesla shares have risen by more than 40 percent over the past month and are now trading at 90 times expected earnings – a significant premium compared to BYD's multiple of 18. Partly, this reflects expectations for other rapidly growing business areas, including energy storage systems. However, as the wealthiest EV markets become increasingly saturated, a broader price range for its models would help better justify the high valuation.