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Meet the new electric vehicle top dog

Meet the new electric vehicle top dog
  • Chinese-made EVs take bigger share of EU market
  • Tariffs unlikely to offer long-term deterrent

It says a lot when there’s a muted reaction to a major automaker boosting annual sales by 42 per cent and increasing profit by 81 per cent. But that shows how highly regarded BYD (HK:1211) (CN:002594) is.

Last week the company announced an annual net profit of Rmb30bn (£3.28bn) for 2023, slightly below consensus forecasts. And although its fourth quarter profit of Rmb8.67bn was 19 per cent higher year-on-year, price cuts meant it was 17 per cent lower than the previous quarter. First quarter figures for 2024, released subsequently on Monday, showed sales volumes 13 per cent up year-on-year but halved compared with the fourth quarter.

A softer domestic market has led to manufacturers slashing prices, which is also encouraging a push into exporting. In 2023, BYD increased the share of revenue generated outside of China, Hong Kong, Macau and Taiwan to 26.6 per cent, from 21.6 per cent a year earlier. HSBC analysts forecast overseas sales of around 450,000 vehicles this year – an 85 per cent year-on-year increase. 

Such gains are made possible given its bargain prices. A breakdown by UBS analysts of the BYD Seal – a mid-sized saloon that rolled off production lines last year – found the manufacturer’s suggested retail price in its home markets was just $25,126 (£19,882) – some $3,000 cheaper than Tesla’s (US:TSLA) Model 3 SR and $14,000 less than the recommended price of Volkswagen’s (DE:VOW) VW ID3.

BYD can do this because of its “in-house manufacturing depth”, UBS analysts argue. Three quarters of the car’s content is produced in-house, with 17 per cent coming from other Chinese companies and only 8 per cent from the global supply chain. By comparison, Tesla only makes 46 per cent of its Chinese-made Model 3 in-house and Volkswagen just 35 per cent of its VW ID3 in Germany.

Yet the European Commission (EC) and others believe there are other reasons why the cars are so cheap. In October, it opened an investigation into Chinese-made battery electric vehicles, to determine whether companies “benefit from illegal subsidisation”.

A new paper by the European Federation for Transport and Environment (T&E) found around 20 per cent of all of the electric cars sold in Europe last year were built in China – around 300,000 units. It expects this to grow to 25 per cent this year.

More than half of the Chinese-made models were from car makers such as Tesla and Renault’s (FR:RNO) Dacia, who manufacture in the country. However, homegrown Chinese brands such as BYD and MG are rapidly catching up. Their share of Europe’s EV market went from just 0.4 per cent in 2019 to 7.9 per cent last year. T&E projects this share hitting 20 per cent by 2027.

Although its investigation is ongoing, the EC said last month it has found “sufficient evidence” Chinese EVs were being subsidised; through the “direct transfer” of funds from the state, tax breaks and government entities providing goods and services at less than cost price. Tariffs seem likely. The UK could also follow suit, with transport secretary Mark Harper telling an industry conference he would use trade remedies to ensure a “level playing field”.

If tariffs are to be imposed, they won’t «shield legacy carmakers for long», said Julia Poliscanova, T&E’s senior director for vehicles and e-mobility supply chains. “Chinese companies will build factories in Europe and when that happens our car industry needs to be ready,” she added.

BYD is already on its way. After opening 230 sales outlets in 19 European markets, the company announced plans to build a car plant in Hungary in December. It already has factories in Thailand and Brazil and is considering a plant in Mexico – but UBS’s analysts think the European market is the most vulnerable. They believe BYD can profitably sell a car made in Eastern Europe for just more than $36,000 – a massive discount to incumbents and only 3 per cent more than it could sell a Chinese-made import. European mass producers such as Volkswagen and Renault are at greatest risk of losing market share both at home and abroad.

Analysts at Bernstein also point to a sizeable valuation gap between BYD and Tesla. Although Tesla still makes a higher margin on its vehicles, the former’s are shrinking as the latter’s are widening. And despite BYD’s faster growth rate, Tesla’s market cap is around eight times higher. Tesla’s shares trade at 56-times FactSet’s forecast earnings compared with BYD’s 14-times. It isn’t just BYD’s cars that look like they offer better value for money.