Electric car producers from China are posing a threat to the Tesla stock long-term. As you will learn by the end of this Tesla vs BYD article, Chinese EV cars are not some cheap junk. They are the real deal and Elon Musk is paying attention now, unlike 10 years ago. And one company stands out among them all: BYD.

In 2024, BYD overtook Tesla as the largest manufacturer of electric vehicles in the world by volume, judging from their recent quarterly figures. But, who is BYD? Why is this important for Tesla’s stock? Can US car makers survive the onslaught of inexpensive Chinese electric vehicles? These are the questions I will tackle here.

Related: Why Tesla Stock Can Go Down to $100 in 2024?

Who is BYD?

BYD was established in Shenzhen in 1995 by Wang Chuanfu, who was a chemist by profession. At its beginning, BYD focused on manufacturing lithium-ion batteries for smartphones. Among BYD’s customers were Motorola, Nokia and Apple.

After its listing debut on the Hong Kong stock exchange in 2002, BYD’s fate took a twist. The company decided to pivot to cars in 2003. At that time, the Chinese government stopped issuing new licenses for car makers. So, BYD had to buy another small car producer with a license.

BYD’s Foray Into Car Making

First, BYD went on with the legacy of the previous owner by producing internal combustion engine cars. But, in 2008, the company changed its course again and made its first plug-in hybrid car: F3DM. Warren Buffett took notice of this development. In 2008, Berkshire Hathaway invested $230 million into BYD. A pure battery electric vehicle, BYD E6, came out in 2009.

Asked about BYD during a Bloomberg interview in 2011, Elon Musk laughed the company off. He said:

“Have you seen their car? I don’t think it’s particularly attractive, the technology is not very strong. And BYD as a company has pretty severe problems in their home turf in China. I think their focus is, and rightly should be, on making sure they don’t die in China.”

Now, fast forwarded to 2024, BYD not only survived, but also zipped past Tesla. The company became the largest EV manufacturer in the world by units sold on a quarterly basis. In his most recent earnings call, this is what Elon Musk had to say:

“If there are no trade barriers established, they will pretty much demolish most other car companies in the world. They’re extremely good.”

Comparing Tesla vs BYD, BYD is a conglomerate and specializes in manufacturing many things. These include its own EV batteries and other electronic components for EV cars. Similar to Tesla, BYD produces solar cell solutions and supercharging equipment for EVs. Such vertical integration helps BYD keep its manufacturing cost low.

China’s Deliberate Industrial Policies

In my opinion, another factor behind BYD’s success could be state subsidies. According to Reuters, China’s subsidies for electric and hybrid vehicles amounted to $57 billion from 2016-2022. This greatly helped China become the world’s largest producer of EVs. The China’s federal authorities terminated this 11-year program in 2022. But, state and local authorities likely still offer subsidies to attract investments.

For instance, BYD received 1.78 billion of yuan in state subsidies in the first half of 2023 according to Nikkei. This roughly translates into $260 million. Can you imagine the numbers before 2023? A quick look confirms that subsidies were in hundreds of millions dollars before 2023 for BYD only.

Comparing Tesla vs BYD, Tesla also receives subsidies for its EV manufacturing from federal and state governments in hundreds of millions of dollars. For instance, Reuters estimates that the Nevada Gigafactory got $1.3 billion in tax breaks.

Industrial Policies are Commonplace

So, it is not like one country is bad and the other is good. Both China and the US pursue industrial policies with generous subsidies. This is nothing new. What’s different with China is this. China initiated a national industrial policy program for EVs early on. They were methodic and systematic about it with a specific end goals in mind. The US did not have a national industrial policy per se for EVs. It was more of a patchwork of tax relief here and there.

As of now, China controls many aspects of battery production, especially materials inputs. True, most of the lithium is extracted in Australia and Chile. But, China controls over 60% of processing raw lithium into battery-grade chemicals. China built a massive supply chain complex around EVs with huge economies of scale. Specialists suggest that Chinese EV manufacturers have distinct cost advantage thanks to this development. These cost advantages translate into as much as 20% over rivals such as Tesla. That’s big.

BYD’s Success With Making EVs

The real breakthrough for BYD came in 2020 though. BYD unveiled Blade battery based on lithium iron phosphate. BYD made a progress with this type of battery due to its decent energy density and high levels of safety.

In 2023, BYD manufactured 3 million cars of which 1.6 million were pure battery EVs. Tesla manufactured 1.84 million pure battery EVs in 2023. So, in principle, Tesla still maintains the lead, but BYD is narrowing the distance very fast. To be fair, most of BYD’s units sold are cheaper models popular in China. Also, over 70% of its electric and hybrid vehicles sales are in China. But, this is gradually changing as BYD expands abroad.

Tesla vs BYD Financial Comparison

Here is a quick comparison of financial performance for Tesla vs BYD.

We see that BYD is narrowing Tesla’s lead in performance terms. While BYD still lags Tesla in terms of profitability, it is getting there. The company greatly improved its gross margin by optimizing and automating its factories over time.

Tesla’s Absence of Low-Priced EVs is a Problem

Tesla and BYD compete head-on with mid- and upper class vehicles in China and some other countries. Both companies price such cars more or less on par based on performance specs in various markets. We can argue about quality comparison of course for Tesla vs BYD. Some people may say that BYD is neck and neck with Tesla, while others argue it is way far off.

But, BYD has one thing that Tesla does not. And that is low-priced models that Tesla does not manufacture as of now. This comes extremely handy, especially in emerging markets.

For example, take BYD’s Seagull model.

Seagull is a hatchback model with 4 seats and a 5-door configuration. The price is astonishing at $11K. True, this model has a much lower driving range of up to 250 miles and is a bit tight on space. But, its low price point is the most appealing factor in many developing markets. The car is arguably perfect for low-range urban environment.

Tesla’s lowest-priced vehicle is Model 3 with a price tag of around $40K before fees, taxes and zero upgrades. Tesla has plans for a cheaper compact crossover model with a price between $25-30K. That’s a move in the right direction. But, still will this be enough to compete with BYD in emerging markets in a mass-market segment?

While Tesla is probably ignoring low-priced EV segment on purpose, at some point this strategy may backfire. True, most likely profit margins are better in mid and upper priced vehicles. But, there are only so many of them you can sell to wealthy customers. As for the low-price vehicles, they can reach wider masses in many other markets. Moreover, BYD can build brand identity with these vehicles if they prove reliable. This will allow it to upsell higher-priced vehicles in the same markets later.

BYD’s Expansion Abroad

BYD is ramping up its sales overseas. The company has factories in Brazil, Japan, Hungary and India. BYD’s popularity continues growing in Europe. Very likely, we will see more focus on developing countries, especially India and Latin America. Also, BYD unveiled a plan to build a factory in Indonesia. So, a focus on Southeast Asia is another direction BYD is taking.

Because of rapid expansion abroad, countries are taking notice of BYD. Some even complain of underpricing. For instance, the European Commission launched an investigation in 2023 against Chinese EV imports. They claim that these imports benefited from generous state subsidies. If proven, EV imports from China may face higher tariffs. They are already taxed at 10%.

Will BYD Enter the US Car Market?

One market that BYD is still to crack is Tesla’s home turf: the US. As it stands today, US consumers cannot buy inexpensive EVs made by BYD. Donald Trump imposed a 25% tax on Chinese auto imports. Joe Biden affirmed that policy and denied “Buy America” tax credits to these imports. Such steps made it hard for BYD to sell cars in America.

But, the funny thing is that with cost advantages and state subsidies, BYD may be able to absorb punitive tariffs and offer its vehicles in America. At least, hypothetically speaking. The US government may have to up its tariffs again. But this is not easy. China may retaliate.

BYD Can Enter US Market via Mexico

In 2024, BYD confirmed that they are scouting for a location to build a car manufacturing facility in Mexico. They quickly went on to say that they have no plans to sell their cars in the US from there. This is a very smart response. Otherwise, the backlash from US politicians would have been gargantuan.

For now, BYD will likely work on establishing their production base and localize their supply chain in Mexico. Once that work is done, there is hardly any reason why BYD would not expand into the US. All they need is to satisfy the USMCA trade agreement requirements and voila.

If the US still insists on denying BYD its car market, the US federal government will have to dismantle the USMCA agreement. Or, they will have to introduce special provisions to USMCA for Chinese car makers and impose more tariffs.

But, one thing is for sure: BYD is eyeing the US market no matter how controversial it is. The company has a factory in Lancaster, California. There, BYD focuses on electric school buses, but steers clear from consumer cars. So, it remains to be seen if expansion in the US becomes a reality for BYD.

Tariff Tradeoffs in the US

All this presents many tradeoffs for the US. Keep tariffs and US consumers will pay higher prices for EVs. Conversely, remove tariffs and a flood of cheap EVs from China will hurt domestic production. The consequences are lost manufacturing capacity, layoffs and fewer alternatives. As for fewer alternatives, we know where monopolies lead. Possible embargos or higher prices.

You do not need to look far for China’s industrial monopoly. For example, take rare earth minerals that are used in advanced electronics. China controls over 70% of rare earth elements production. There were many instances when China weaponized this monopoly against other countries. Likewise, China pretty much cornered the solar panel market.

I am not saying that someone is good or bad. The US uses the dollar as a financial weapon against its enemies too, rightly justified or not. So, all I am saying is that such reliance on China poses many security questions. It becomes understandable why the US and Europe protect their car makers.

The whole reason behind low prices for BYD’s cars is cheap labor at home and its own designed and manufactured batteries. For this reason, Western countries use tariffs to encourage BYD and others to set up shops on their home turfs. At least, this way both BYD and respective domestic economies can benefit.

Investors Takeaways for Tesla vs BYD

The bottom line is this for Tesla vs BYD competition. Both Tesla and BYD can co-exist. But, BYD is making it harder for Tesla’s expansion abroad, especially in developing markets. There, BYD may outmaneuver Tesla with its more affordable options. I think Elon Musk’s focus on producing cheaper EV models is a move in the right direction.

Once BYD establishes in developing regions with its own factories, it will be more difficult for Tesla and others to compete. BYD cut its teeth in China and is expanding in Brazil, Indonesia, India and other countries. Of course, many compare Tesla to Apple of EVs, while BYD is more like a mass-market Android producer. But, I would not discount them. BYD has its own luxury vehicle lineup that competes directly with Tesla.