Chinese EV Firms Are So Done With BYD

Over the past few weeks, China’s electric vehicle industry has been embroiled in an ugly round of infighting. The reason: a raging price war ramped up by BYD.

It’s a story that began last month when BYD announced brutal new price cuts. They included a whopping 22% discount on its cheapest model — the Seagull hatchback — that brought its price down to less than $8,000 in China. That’s an unthinkably low cost for an EV packed with everything from fast charging to autonomous driving assistance. And it’s a cost that almost all EV-makers will struggle to match.

That same day, the chief of Great Wall Motors, one of China’s oldest carmakers and BYD’s friend-turned-foe, made a series of explosive statements in an interview with Chinese tech finance portal Sina Finance. Wei Jianjun alleged the price war in the industry was destroying the bottom lines of car companies and their suppliers, with many struggling to survive, and most operating at a net loss. He also took direct aim at BYD citing an investigation since 2023 into its failure to meet emissions standards in two of its best-selling models at the time.

And then, Wei dropped an even bigger bomb: “The EV industry’s Evergrande is already here,” he told Sina. In case you forgot, Evergrande was China’s once-largest property developer that went belly-up in 2022 due to its more than $300 billion worth of debt.

Naturally, Wei’s comment left many wondering if he was referring to BYD. And that speculation coupled with concern around its steep discounts wiped more than $22 billion off BYD’s market cap in a week. Its Hong Kong-listed shares tanked nearly 21% from the all-time high they hit on the day the discounts were announced.

Two weeks later, as China’s biggest automakers converged at the Global Automotive Forum in Chongqing city, BYD and its aggressive discounts took centre-stage again.

Speaking at the forum, Geely’s chief backed concerns on BYD’s emissions standards and called GWM’s Wei the industry’s “whistleblower”. He was referring to the fact that the investigation into BYD was the result of a formal complaint by GWM at the time. Next, the chief of GAC Aion chimed in, agreeing with that speech. And what followed after was an industry-wide damning of the price war, with Chery’s head comparing price cuts to “quenching thirst with poison” and Changan Automobile condemning "vicious competition without a moral and legal bottom line”.

This public display of anger and frustration by the world’s largest electric vehicle market is a stark contrast to its effort over the past year to put a united face against a slew of tariffs imposed by the likes of the United States, European Union and Canada.

And it speaks to how the raging price war has pushed this mammoth sector to the edge. The industry was already choking with competition, but now falling local demand and significant overcapacity has completely squeezed out profitability. In the first quarter of the year, Chinese automakers averaged a meagre profit margin of 3.9%, with S&P Global predicting that number to shrink further for most firms over the year.

BYD has managed to traverse these circumstances thanks to several factors such as economies of scale, in-house battery production, and factories in small cities that give it access to cheap labour. But analysts point out that it is BYD’s policy of delaying supplier payments for many months that give it the greatest scope to cut prices.

And that policy is also BYD’s Achilles heel.

Addicted to debt

Just this year, multiple analysts have pointed out that by delaying supplier payments — a method known as supply chain financing — BYD has managed to create a huge vulnerability and also hide the true extent of its debt. In January, Hong Kong-based GMT research said BYD was “addicted to supply chain financing,” and that its hidden debt last year was more than 11 times the amount it had shown in its books.

This week, Murthy Grandhi, an analyst at GlobalData, explained just how disastrous that could quickly become. Grandhi noted that “BYD’s financing method involves issuing commercial paper to suppliers, who then sell it to banks.” For now, with BYD raking in record revenues, sentiment around that paper is pretty stable.

But “if credit sentiment shifts, this paper could trade below par. Banks may demand cash, suppliers may go unpaid, and production lines could stall — like Evergrande’s liquidity crisis,” Grandhi explained.

That’s a crisis that will not just hurt BYD, but also its vast supply chain that employs more than 900,000 people, and China’s EV industry as a whole. “A disruption in payments could trigger a liquidity shock across the supply chain,” Grandhi explained.

On BYD’s part, its PR chief, Li Yunfei, has desperately tried to prop up sentiment. Amid the drop in the firm’s share price, Li rejected concerns on the EV industry's health as "alarmist” and defended BYD’s balance sheet, saying its debt-to-asset ratio and liabilities of $80.6 billion were lower than that of bigwigs like GM, Ford, Apple and Boeing. He claimed those high numbers were a result of BYD’s explosive growth, while also suggesting criticism of the company were “malicious smear campaigns” that it was determined to take legal action against.

But perhaps BYD could also use a lesson from the current state of affairs at its once biggest rival, Elon Musk-led Tesla: Perception and sentiment can shift in the blink of an eye.

Beijing’s tightrope 🤹 

Back to BYD: With everything that’s going on, it appears Beijing will have two options to choose from — protect its near $380 billion industry from imploding or put a leash on its fastest growing carmaker.

Talk about a rock and a hard place.

While China has spent a tremendous amount of resources to develop its EV industry, BYD’s value to Beijing lies beyond just the scale of its sales. The company has become a symbol of China’s tech edge over the West in EVs, and BYD edging past Tesla this year to become the world’s biggest EV-seller is testament to that. Plus, BYD is now also challenging Tesla in the self-driving space. BYD has squeezed its suppliers to procure hardware for the tech at lower costs. And it also collects a huge amount of data to train the AI models that underpin its self-driving technology from the millions of cars it already has on Chinese roads. In contrast, Tesla, so far, cannot access any such data due to Chinese laws. BYD’s fast growth in the EU also adds to that advantage. Despite facing steep tariffs, the carmaker has more than quadrupled its sales in Europe as of the first quarter of this year, and now holds a 4.1% share of the region’s EV market. 

Then there’s past lessons that could put Beijing on guard against taking strong regulatory action. Xi Jinping’s crackdown on tech firms shaved more than a trillion dollars off of some of China’s biggest firms between 2020 and 2023. With China’s economy struggling to find its legs currently, Beijing cannot possibly afford a similar crackdown on a cash cow as big as BYD.

That would explain why China has taken a more subdued approach to this risky price war, for now. Aside from holding a top-level meeting against the dumping of cars in the second-hand market and establishing a shorter window for supplier payments, most state-linked commentary can be described, at best, as light-handed scolding.

Will that be enough to prevent a potential shakeout — or worse — in China’s EV industry? Probably not. 

• Officials from the US and China have agreed on details of a trade deal after two days of talks, with final tariffs on Beijing totalling 55%.

• Negotiations on China’s rare earth blockade have now become part of the country’s talks with the EU around the bloc’s steep EV tariffs.

• Discounts of up to $351 helped Apple re-capture its spot as the top smartphone seller in China last month.
  

• And a notorious ethnic group in northeast Myanmar is guarding new Chinese-run rare earth mines in the country’s Shan state.