China’s Automotive Association Tried Curbing the EV Price War but the Move Failed

The Chinese EV (electric vehicle) market which is among the most competitive globally has been witnessing a brutal price war. Last week, Tesla along with over a dozen Chinese automakers pledged to avoid “abnormal pricing” and promote “core socialist values.” However, the move seems to have failed and The China Association of Auto Manufacturers (CAAM) has retracted the pledge.

The pledge was signed by 16 automakers in total of which only Tesla was a foreign automaker. The automakers signed the pledge at an industry conference in Shanghai which stated they “take on the heavy responsibility of maintaining steady growth, strengthening confidence and preventing risks.”

China EV price war

The EV war in China began last year when Tesla lowered car prices. The EV giant’s price cuts were followed by similar announcements from other carmakers including Xpeng Motors, Ford, Toyota, and Nissan.

Last month, even NIO lowered car prices. Previously the company had categorically said that it won’t join the price war.

The price war was taking a toll on the earnings of startup Chinese EV companies most of which are anyways posting losses. Tesla’s operating margins also fell to 11.4% in the first quarter as compared to 19.2% in the corresponding quarter last year. That said, the company’s margins are still among the highest in the industry.

Tesla was the only foreign automaker to agree to price war truce

Interestingly, China was the only foreign automaker to agree to the EV price war truce. China laid out the red carpet when Tesla was setting up operations in the country. It helped the company with low-cost loans while approvals for its plant also came quite quickly.

However, the relationship between China and Tesla has soured over the last couple of years. Tesla has been trying to cajole Chinese authorities to allow a capacity expansion of its Shanghai Gigafactory but so far hasn’t got the approval.

Last month. Tesla’s CEO Elon Musk visited China and met its top leadership. China, which is the world’s largest automotive market, would be key if Tesla is to reach anywhere near the 20 million annual deliveries that Musk is targeting by 2030. Along with a key market, China is also a low-cost production destination for TSLA as it uses the country as a hub to export cars to other markets.

BYD is the largest NEV seller globally

Tesla sold 1.31 million EVs last year and surpassed the milestone of selling over 1 million cars in a year.

BYD meanwhile shipped 1.85 million NEVs (new energy vehicles) last year which were roughly equally distributed between BEVs (battery electric vehicles) and PHEVs (plug-in hybrid vehicles).

Notably, Tesla only sells BEVs and is the global leader. However, BYD surpassed Tesla to become the largest seller of NEVs last year.

Berkshire Hathaway is the biggest stockholder of BYD and the conglomerate’s vice chairman Charlie Munger believes that it is his best-ever investment. He also took a swipe at Tesla and said that while the Elon Musk-run company has lowered car prices, BYD has actually increased them.

China’s EV price war truce failed

Meanwhile, CAAM has said that the EV price war agreement violated China’s antitrust law and it would retract the pledge. To be sure, the fate of the deal looked in limbo as just a day after the pledge, Tesla announced a $500 referral bonus which is tantamount to discounts.

Xpeng Motors priced its G6 SUV below Tesla Model Y

Last month, Xpeng Motors priced its G6 SUV about 20% lower than Tesla Model Y.

The car is based on Xpeng Motors’ new production platform called SEPA2.0 (Smart Electric Platform Architecture) which the company unveiled in April.

While launching the platform, XPEV had said, that it “will shorten future models’ R&D cycle by 20%, significantly optimizing R&D efficiency” and help it lower vehicle costs.

The company has priced the car between 209,900 yuan to 276,900 yuan and customer deliveries would begin in July.

In comparison, Tesla Model Y starts at 263,900 yuan in China after multiple price cuts over the last year.

China is the second largest market for Tesla while it is the biggest market for the company’s Model Y. The model was incidentally the best-selling car globally in the first quarter, after excluding pickups.

It was no mean feat for Tesla as for the first time ever an all-electric car was the bestselling model globally. Together, the Model Y and Model 3 account for over 95% of Tesla’s deliveries.

Musk believes Chinese companies are tough competitors

On multiple occasions, Musk has praised China’s manufacturing ecosystem and EV companies.

In May, Musk termed China-based EV maker BYD “highly competitive.” In 2011, the billionaire had laughed at the possibility of BYD as a competitor to Tesla.

During Tesla’s Q4 2022 earnings call earlier this month, Musk said, “we have a lot of respect for the car companies in China. They are the most competitive in the world. That is our experience.”

He added, “They work the hardest and they work the smartest. And so, if I were to guess, probably some company out of China is the most likely to be second to Tesla.”

Previously also the billionaire praised Chinese workers for burning the 3 a.m. oil” while criticizing American workers for “trying to avoid going to work at all.”

Ford’s CEO Jim Farley also echoed similar views and said during the Q4 2022 earnings call and said: “I don’t think you can be globally successful in the EV business if you don’t compete with the Chinese.”

China is the world’s biggest EV market

He also later said that Ford’s biggest competitors are not auto giants like Toyota and General Motors but Chinese automakers.

“The Chinese are going to be the powerhouse, we think. To beat them, you either have to have a very distinct brand — which we think we do, by leaning into our icons — or you have to beat them on cost. But how do you beat them on cost if their scale is five times yours?” said Farley in May.