Facing rapidly dwindling sales figures in China, Tesla CEO Elon Musk slashed prices on his Shanghai-built cars to narrow the gap to local industry leader BYD, putting his stock under renewed duress.
On Thursday, the U.S. carmaker lowered the entry point for his single-motor Model 3 sedan by a good 13% to 229,900 yuan, or roughly $33,500. Its equivalent sibling, the roomier Model Y crossover, now retails from 259,900 yuan, or nearly $37,900—a full tenth less than what it previously cost.
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Tesla’s rising challenge from BYD comes as demand has ebbed from one week to the next. While that is undoubtedly due in part to the grim wave of COVID overwhelming China, its arch-rival has emerged seemingly unscathed from the broader economic malaise.
The latest weekly insurance data showed BYD sold 55,706 cars in the final week of last year to Tesla’s 4,338. Even stripping out the plug-in hybrids that make up a portion of BYD’s volumes, it is still outselling Tesla on a like-for-like basis.
That is at least in part because BYD features a broader portfolio split across two main lines, Dynasty and Ocean. The latter features, for example, an entry hatchback called the Dolphin that starts for as little as 116,800 yuan ($17,000).
Tesla’s “fully autonomous” $25,000 small car first teased at Battery Day in September 2020 may finally be revealed as a concept in March at the upcoming investor day, but it could be years away from production.
Price cuts diluting Tesla’s margins
Making matters worse, the massive Giga Shanghai factory may have a depleted backlog of existing orders just as exports to Europe are on the decline as Giga Berlin slowly ramps production.
According to Patreon-funded account TroyTeslike, the number of cars back ordered but not yet delivered to Chinese customers has melted away entirely, going from 174,000 vehicles at the end of July to precisely zero as of mid-December.
With fewer and fewer markets to absorb the excess inventory, production recently had to be trimmed at Tesla’s Giga Shanghai, the brand’s largest and most efficient global vehicle plant.
Thursday’s price cuts will almost undoubtedly dilute Tesla’s industry-leading operating margins, as a 10% reduction of the price cannot generally be offset by efficiency measures elsewhere in the business.
“We still haven’t seen a full-quarter where we have had the price reductions from China yet—remember those happened in October so those are going to hit Q4,” said Rob Mauer, host of YouTube channel Tesla Daily with 222,000 subscribers, during his Thursday podcast.
“Now we’re having another price cut before we even get more visibility into that. So this is significant, it’s definitely going to impact Tesla’s profit.”
Tesla is due to report fourth-quarter earnings after the close of trading on Wednesday, January 25rd.
News of Musk’s impending price war in China hurt Hong Kong-listed shares of Chinese EV manufacturers. BYD slid 2.6% in trading, while smaller NIO dropped 4%. Li Auto and Xpeng fared even worse, with both losing roughly 7% in the session.
This story was originally featured on Fortune.com
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