Elon Musk Says Chinese EV Companies Could ‘Demolish’ Competitors
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Tesla stock fell more than 12% yesterday after the company warned of a growth slowdown. Its CEO Elon Musk meanwhile was all praise for Chinese EV (electric vehicle) companies and said that they could “demolish” competitors.
“Frankly, I think, if there are not trade barriers established, they will pretty much demolish most other companies in the world,” said Musk during the Q4 earnings call.
Musk on Chinese EV companies
The billionaire added, “The Chinese car companies are the most competitive car companies in the world. So, I think they will have significant success outside of China depending on what kind of tariffs or trade barriers are established.”
To be sure, this is not the first time that Musk has praised Chinese EV companies and the world’s richest person had made similar comments a year back during Tesla’s Q4 2022 earnings call.
“I think we have a lot of respect for the car companies in China. They are the most competitive in the world. That is our experience,” Musk had then said.
He added, “And the Chinese market is the most competitive. They work the hardest and they work the smartest. That’s — so a lot of respect for the China car companies that we’re competing against. And so, if I would have guessed, there are probably some company out of China as the most likely to be second to Tesla.”
In May, Musk was all praise for giant BYD and termed it “highly competitive.” In 2011, the billionaire had laughed at the possibility of BYD as a competitor to Tesla.
BYD became the world’s biggest seller of electric cars
Last year, BYD was the world’s largest seller of new energy vehicles – which includes both battery electric cars and hybrids. The Chinese EV giant delivered over 3 million cars in 2023 which was in line with its guidance. Importantly, it delivered 525,409 electric cars in Q4 which was ahead of Tesla.
While Tesla is still the EV market leader in terms of full-year EV deliveries, BYD was the biggest global seller of EVs in Q4. The bulk of BYD’s sales however come from its home market of China even as it is trying to expand into new geographies.
Analysts are apprehensive about Chinese EV companies
Wall Street analysts are getting cautious about Chinese EV stocks amid the intensifying price war and the feared slowdown in sales growth. Chinese EV stocks were mixed last year and while names like Li Auto and Xpeng Motors closed in the green last year, they fell sharply from their highs.
In its report earlier this month, Bernstein said, “We expect competition within the domestic market to remain intense and put pressure on pricing and profitability.”
It added, “Competitive landscape will be more challenging, and pricing pressure to ensue. Although EV demand is set to remain resilient, the industry will confront three major challenges on the supply side: overcapacity, new model launches and the rise of new tech entrants such as Huawei and Xiaomi, which point to growing competition.”
Notably, there has been an intense price war in the Chinese EV industry for over a year now. Last year, The China Association of Auto Manufacturers (CAAM) tried to bring about a truce in the price war.
EV price war
However, the truce failed and shortly CAAM 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.
The EV war in China began in Q4 2022 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 year, even NIO lowered car prices. Previously the company had categorically said that it wouldn’t join the price war.
Tesla’s margins have plummeted
The price war was taking a toll on the earnings of startup Chinese EV companies most of which are anyways posting losses. NIO’s gross margins fell to a mere 1% in Q2 and Xpeng Motors posted negative gross margins in Q2 and Q3. Tesla’s operating margins also fell to 8.3% in the fourth quarter of 2023 which are less than half of their peak. That said, the company’s margins are still among the highest in the industry.
Meanwhile, analysts are now cautious about Tesla’s near-term outlook after it warned of slower growth in 2024. The company has missed its long-term delivery growth CAGR of 50% for two consecutive years and its guidance implies that it would miss it in 2024 as well.
As for Chinese EV companies, they have also been under pressure in 2024 amid the pessimism towards Chinese stocks.
Markets have been concerned about Chinese shares after a flurry of economic data showed that the world’s second-largest economy continues to sag. The country’s real estate and banking sectors continue to be in turmoil and the Chinese government has so far refrained from large-scale stimulus to revive the economy. The Chinese Central Bank has also kept policy rates on hold while markets were expecting a rate cut.
Chinese stocks have crashed in 2024
Chinese stocks peaked in early 2021 and have since been sliding and the crash has wiped off $6 trillion in combined market cap of Hong Kong and Chinese shares. Also, Hong Kong recently lost its status as the world’s fourth biggest equity market to India whose stock markets are trading near record highs.
Investors have been quite bearish on Chinese stocks. In a research note, Goldman Sachs analysts said, “The past three years were no doubt a challenging and frustrating period for investors and market participants in Chinese equities.”
While Chinese EV companies are giving a tough fight to Tesla as Musk has admitted on more than one occasion, investors are shying away from the sector as they shun Chinese stocks amid higher risks.
