Disruptive Tactics: Elon Musk & Tesla are wreaking havoc in China’s EV market by giving insane discounts

Tesla is at it again in China—slashing prices and giving out discounts, to the point where other EV manufacturers in the country are sweating bullets.

These new markdowns are stirring up discussions about a potential price war, mainly between BYD and a few other major domestic players, and Tesla, which continues to be an aspirational brand(a good performing one, mind you) in the Chinese EV market.

Waging a price war
Over the weekend, Tesla introduced a set of discounts across their outlets in China. They’re offering a pretty enticing discount of 8,000 Yuan or around $1,100 for specific Model 3 sedans. And that’s not all—the prices for the fancier versions of the Model Y crossover vehicle, both the long-range and performance ones, have dropped by a mouthwatering 14,000 Yuan (roughly $2,000).

So, the long-range Model Y is now kicking off at about 300,000 Yuan, or $41,400. Back at the beginning of 2023, it was going for around 358,000 Yuan, or $49,400. As for the top variant performance version of the Y, it now starts at about 350,000 Yuan, or $48,300. At the start of the year, it had a price tag of about 398,000 Yuan, or $55,000.

These reductions are showing up right after some of China’s most prominent EV makers offered a fresh set of discounts in reaction to a different set of discounts that Tesla had introduced a couple of months ago. The Geely-owned EV brand, Zeekr, for example, decided to lower the prices of its Zeekr 001 crossover-style vehicle. They’ve chopped off around $5,000 on average, and now the base prices range from approximately $40,000 to $52,000.

Now, the million-dollar question is whether Tesla dropped their prices as a comeback to Zeekr or just because of market situation.

China – The biggest EV market
The demand for EVs in China has been looking pretty solid in 2023, partly thanks to these price chops. Citi analyst Jeff Chung says that by July, they’ve managed to sell about 3 million battery-electric vehicles (BEVs), which is a whopping 23 per cent jump from the previous year. These new energy vehicles, which include both BEVs and plug-in hybrids, made up nearly 36 per cent of all the new cars sold in July. That’s a good 2 per cent increase from June.

Zeekr has sold about 55,000 BEVs up until July. While that’s just a small 2 per cent of the entire market, it’s an impressive 127% surge from the previous year. Meanwhile, Tesla didn’t lag behind—during the first half of 2023, they managed to sell roughly 294,000 BEVs in China, which is a solid 50 per cent leap from the year before.

So, there’s definitely demand, but the real story here is the speed at which these car makers are slashing prices. Tesla included. And this trend might keep investors on their toes for the next few months, keeping a close watch on demand.

Now, this is quite noteworthy, as it marks the first time we’ve seen a drop like this from one month to another since last December. It’s a clear sign that things are changing and there are new challenges emerging in China’s car market.

Tesla is desperate to capture a significant portion of China’s EV market
These price cuts might just bring up concerns about profits too. Sure, things like manufacturing costs and the types of cars they sell matter, but usually, lower prices mean slimmer profit margins. That’s what’s happening with Tesla in 2023. Their operating profit margin for the second quarter landed just under 10 per cent, which is a step down from the almost 15 per cent they had around the same time last year.

These price cuts haven’t been all bad. Tesla managed to deliver a jaw-dropping 466,140 EVs in the second quarter alone. And if things keep going this way, they’re on track to deliver about 1.8 million EVs in total for 2023. That’s a nice leap from the 1.3 million they delivered in 2022.

This growth in deliveries is one of the reasons why Tesla’s stock has been soaring, up by a remarkable 97 per cent this year up until Monday’s trading.

Sure, the stock is on the rise, but don’t be surprised if things get a bit bumpy at the start of the week. The market is still processing all these fresh price cuts, and that might lead to a bit of rollercoaster action for Tesla’s stock.

These moves by Tesla have definitely had an impact, especially when we talk about their vehicles made in China. According to the China Passenger Car Association (CPCA), the numbers tell an interesting story. In July, the sales of these China-made Tesla vehicles dropped by a significant 31 per cent compared to the previous month of June.