How is the future of the BYD vs Tesla battle?
Many people in the West may not have heard of BYD Auto – but the Chinese firm quietly became the world’s leading electric vehicle manufacturer last year. BYD has been growing rapidly since 2020, when it sold around 400,000 EVS, largely because of the rise in EV demand in China. By 2023, BYD was selling more than three million EVs a year – beating Tesla in Q4 of 2023 to take the crown as the world’s leading EV seller.
Tesla, previously dominant in the EV market, is now facing a real battle against its Chinese rival in the fight to lead the industry. The battle is leaving some investors asking which side to choose.
Will Tesla grow in 2024?
Analysts are giving BYD as much as 70 per cent upside, as per a recent report by CNBC. According to reporting by Weizhen Tan, Bernstein, which has recently reiterated its ‘sell rating’ over Tesla stock, has predicted 2024 will be a ‘tough’ year for the auto manufacturer. The firm has forecasted that it will struggle to grow deliveries by as much as 20 percent, falling well short of its 50 percent target. At the same time, the firm has argued BYD is trading well below its true value, at just 13 and a half times its price-to-earnings ratio, and has said the firm has more than 60 per cent potential upside.
Tesla’s fortunes were struck a fresh blow in January when CEO Elon Musk issued a warning over sluggish sales. Tesla shares tumbled more than 12 per cent after Musk commented to analysts on a post-earnings call. Reuters reports that more than $80 billion of Tesla’s market value was wiped out in a single day. Speaking to the outlet, Michael Hewson of CMC markets said:
“The problem for Tesla is any significant attempt to boost sales from here on will probably need to be achieved at the cost of further falls in operating margin, due to having to compete with BYD in China, as well as increased competition elsewhere.”
Tesla cutting prices to stay competitive
One of the challenges facing Tesla is that many of BYD’s vehicles are cheaper than those of their competitors. Responding to flagging growth, Tesla slashed the price of its cars in December to around £28,000 in an attempt to compete with the similarly priced BYD Han sedan.
As per reporting by CNBC’s Evelyn Cheng, Tesla’s prices have been cut further and faster than BYD’s, but most BYD EVs remain cheaper than their Tesla equivalents. While Tesla’s Model 3 was down 6 per cent in December against the previous year, and the Model Y price was slashed by 11 per cent, the BYD Han was cut by just 5 per cent.
Industry experts say a key factor in BYD’s competitive edge on pricing is that the firm has its own battery supply chain, which helps to keep costs down. Speaking to CarsGuide, Scott Nargar at Hyundai said:
“I don’t think we’ll ever be able to [have] price points like them…BYD has their own battery supply chain. And if you don’t have a supply chain, then you’re leaning on a government body or CATL, and so they’ve got scale, and they’ve definitely got a price advantage over us.”
Is BYD undervalued?
Many analysts have long argued that Tesla stock is overvalued. A recent forecast by GLJ analyst Gordon Johnson, put Tesla’s 12-month price target at just 10 per cent of its current trading value, which would mean falling from around £230 a share to just $23 a share. But this has been termed an ‘extreme view’ – with many analysts hoping Tesla will return to form by meeting and exceeding its growth targets in the future.
On the other hand, some analysts argue that BYD stock is undervalued. A recent report by Nasdaq.com highlighted that Tesla’s market cap is almost ten times higher than BYD’s despite being outsold by the Chinese firm at the end of 2023. One of the reasons for this, the outlet reports, is that Tesla still manages to operate an 8 per cent margin, which is higher than most of its competition.
Moreover, according to some analysts, Tesla’s software business is thought to be where the big bucks are, with investors holding out hope that technology advances pioneered by the firm will pay dividends in the long run.
A long-time investor in BYD is Warren Buffet’s Berkshire Hathaway. The investment firm purchased 225 million shares in BYD in 2008. 2023 marked the first time Berkshire Hathaway sold BYD stock – offloading 88 million shares. This is an unusual move for Buffet, who once famously said his favourite holding position was forever. Analysis by Business Insider says the move should be closely considered. They reported:
“Buffett and Munger will dump a stock or dispose of a business if there’s a major decline in its situation or prospects. For example, they exited the “Big Four” US airlines after the pandemic struck in early 2020, believing air travel wouldn’t recover for years to come. They also sold Wells Fargo after years of scandals, despite being one of its biggest shareholders for many years.
“Berkshire has scored a big win with BYD, as it paid the equivalent of about $1 a share in 2008, and the Hong Kong-listed shares now change hands at more than $30…It’s unclear whether Buffett and Munger sold BYD stock because they wanted to take profits, free up cash, prune their portfolio, cut their geopolitical risk, or avoid future problems at the company. Berkshireshareholders will be watching closely to see if they sell any more shares – or provide further explanation.”
The future of the BYD Tesla battle
The fierce competition between Tesla and BYD is dominating the EV market. Tesla’s charismatic CEO, Elon Musk, has driven the company’s success through groundbreaking advancements in battery technology and autonomous driving, capturing the imagination of investors worldwide.
On the other hand, BYD’s strategic approach, particularly its focus on the Chinese market and controlling supply chains, has solidified its position as the top dog in the EV space (for now). The competition has ignited a fierce fight for market dominance. For investors, this rivalry presents a unique opportunity and challenge. While Tesla has been a darling of the stock market with its soaring valuation, BYD’s promising initiatives in the rapidly expanding Chinese market offer an alternative avenue for growth. Analysts, in turn, find themselves navigating the complex landscape of predicting the future trajectory of these two industry giants, as they balance the risks and rewards associated with each company’s unique strategies.