China’s journey in vehicle production is a tale of rapid transformation and global ambition.

From its early days of manufacturing basic, low-cost cars, China has grown into a powerhouse of innovation, particularly with the rise of electric vehicles (EVs). Central to this narrative is BYD Company Limited (1211.HK), a company that began humbly but has now emerged as a formidable competitor in the global EV market. BYD’s ability to produce high-quality vehicles at competitive prices has fueled its expansion into international markets. With a strong focus on sustainability and cutting-edge technology, BYD is not just participating in the EV revolution but leading it.

As it begins to rival industry giant Tesla (NASDAQ: TSLA), BYD’s ascent highlights China’s evolving role in reshaping the automotive industry.

Founded in 1995, BYD or “Build Your Dreams” is a global high-tech leader in New Energy Vehicles (NEV), committed to technological innovation and sustainability.

With over 29 years of growth, BYD has significantly impacted sustainable mobility across Automotive, Rail Transit, Renewable Energy, and Electronics. BYD’s advanced technology and intelligent performance have transformed the global NEV industry. The company operates in over 400 cities across 70 countries and six continents.

A Fortune Global 500 company, BYD is listed on the Hong Kong and Shenzhen Stock Exchanges.

BYD’s international expansion in the electrification front is particularly compelling due to its strategic advantages and aggressive growth targets.

Leveraging vertical integration and automation, BYD is able to produce electric vehicles at remarkably low costs, with some models priced around $10,000 USD. This cost efficiency allows BYD to significantly expand its market reach, making vehicle ownership possible for many in emerging markets who previously could not afford it. This expansion is not only beneficial for BYD but also for suppliers within the supply chain, though it poses a significant challenge for competitors.

We believe in the current market only Tesla has a viable chance to compete effectively against BYD.

However, in May US president Joe Biden announced a new tariff increase on EV’s from China, increasing from 25% to 100%. The protectionist policy was immediately denounced by Tesla boss Elon Musk who opposed the tariff and was quoted as saying “Neither Tesla nor I asked for these tariffs”. As the auto inventory downcycle begins to bottom out and re-industrialisation accelerates, BYD is well-positioned to capitalise on the next upcycle in the energy supply chain, particularly for AI applications. While geopolitical tensions remain a significant wildcard, these conditions present opportunities to accumulate positions in companies poised to benefit regardless of political shifts or policy changes towards China.

BYD’s strategic moves and competitive pricing in international markets not only expand their global footprint but also reshape the automotive industry by making sustainable mobility accessible to a broader audience.

BYD is emerging as a formidable threat to Tesla in the EV market, with its rapid growth and strategic advantages.

The tug of war over who is the largest EV maker globally continued in the March quarter. Having taken over from Tesla in December, BYD handed back the title after selling 300,114 EVs in the first quarter of this year. This was down from the 526,409 vehicles sold in the previous quarter. Tesla also saw a decline for the March 2024 quarter but delivered 386,810 units.

As discussed earlier, BYD is aggressively expanding its global footprint, with plans for new factories in Thailand, Brazil, Hungary, and Indonesia.

It is also unveiling advanced hybrid systems, faster charging capabilities, and improved batteries, demonstrating a commitment to continuous innovation. In contrast, Tesla appears to have shelved plans for any all-new vehicles for years and will look to cheaper variants of the existing Model 3 or Y.

Like Tesla, BYD doesn’t just produce vehicles.

BYD is one of the world’s largest EV battery makers, producing its proprietary Blade LFP batteries in-house. This vertical integration allows BYD to control costs and quality, giving it a competitive edge over Tesla, which relies on external suppliers like Panasonic and CATL for batteries. Tesla is working on its own 4680 batteries but production is still relatively low and key technical hurdles remain.

Despite significant price cuts, BYD has maintained impressive gross margins of 21.9% in Q1 2024, compared to Tesla’s 17.4%.

BYD’s net income grew 10% year-over-year in Q1 while Tesla’s earnings plunged 47%. The current price war in the EV market, exacerbated by rising interest rates, has forced manufacturers to lower prices to attract consumers. This has eroded Tesla’s previously best-in-class profit margins, while lower-margin businesses like BYD might also face risks. However, BYD’s success in vertical integration—a strategy also employed by Tesla—could help it achieve better efficiencies and more robust operating margins in the future. BYD’s ability to produce critical EV components in-house, including batteries and software, gives it a significant edge.

BYD’s operating profit margins currently resemble those of legacy automakers more than Tesla’s, its ongoing improvements in scale and efficiency suggest that it could further challenge Tesla’s dominance in the global EV market.

With its vertically integrated operations, diverse and affordable product lineup, rapid global expansion, and impressive financial performance, we feel BYD represents a significant threat to Tesla’s dominance in the EV market.

While Tesla struggles with ageing models, slumping demand, and eroding margins, BYD continues unveiling advanced technologies. BYD’s ability to produce high-quality EVs at remarkably low costs allows it to undercut Tesla and gain market share, particularly in emerging markets. Despite significant price cuts, BYD maintained record gross margins and improved profitability. As BYD aggressively expands its global manufacturing footprint, it is well-positioned to capitalise on the accelerating transition to electric mobility and reshape the automotive industry, posing an unprecedented competitive challenge to Tesla’s EV leadership.