BYD, China’s largest electric vehicle (EV) manufacturer, has achieved a remarkable milestone by surpassing its American competitor, Tesla, in quarterly revenues for the first time. BYD reported revenue of Rmb201bn ($28.2 billion) for the third quarter, exceeding Tesla's $25.2 billion. Supported by strong sales, the Warren Buffett-backed automaker sold a record-breaking 1.1 million vehicles in this period, thanks in part to renewed Chinese government subsidies for EVs.
Revenue Growth and Profit Margin Pressures
Despite the 24% increase in sales, BYD’s profit margins were affected by the ongoing price competition within China, the world’s largest EV market. The company’s gross margin slightly dropped to 21.9% from 22.1% in the previous year. Additionally, BYD’s net income rose by 11.5%, reaching Rmb11.6 billion, yet analysts noted that the fierce competition is impacting its profitability on a per-vehicle basis.
Rather than engaging in direct price cuts, BYD has opted to introduce new EV models with enhanced features and extended range at lower prices compared to older models. This strategy has allowed BYD to maintain its market leadership amidst the price war but has resulted in reduced profit margins per vehicle.
Competition and Impact on Domestic and Foreign Manufacturers
The price war in China's EV market is putting pressure on both domestic and international automakers. For instance, Volkswagen warned that its Chinese joint ventures’ operating profit could fall to the lower end of its forecast, reaching approximately €1.6 billion instead of the anticipated €2 billion. BYD’s vertically integrated production, which includes battery and chip manufacturing, has allowed it to maintain a competitive edge with a 21.9% gross margin, higher than Tesla's 17% and far above other Chinese competitors such as Zeekr (14.2%) and Xpeng (6.4%).
Challenges and Prospects for Overseas Expansion
As BYD continues to expand globally, its future growth may rely heavily on success in foreign markets. However, this expansion faces hurdles due to increased western protectionism. In a recent decision, the European Union announced an additional 17% tariff on BYD's EV imports, which is in addition to the existing 10% duty. Although BYD has taken steps to reduce its dependence on the Chinese market by opening a factory in Thailand — its first outside of China — overseas sales still accounted for only 7.9% of its total sales in September, down from 9.8% the previous year.
Analysts at Goldman Sachs highlighted potential obstacles to BYD’s international expansion, including operational complexities, regulatory changes, and geopolitical risks. Meanwhile, Citi analysts cautioned that BYD’s visibility in the export market may not improve significantly in the short term due to these challenges.
The company’s shares, listed on the Hong Kong Stock Exchange, saw a 0.7% dip prior to the release of its latest financial results, reflecting investor caution amidst the challenging market landscape.
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