China’s electric vehicle (EV) sector is experiencing a price war that is affecting share prices and prompting government intervention.

Analysts attribute these challenges to weaker demand and overcapacity, which may reduce profits and drive some companies out of the market.

BYD, the market leader, has lost US$21.5 billion in market value since May 2024 due to aggressive pricing strategies.

The average production capacity use rate in the industry was 49.5% in 2024, according to Gasgoo Automotive Research Institute.

Overcapacity remains a major concern, leading some automakers to reduce operations or seek additional funding.

.source-ref{font-size:0.85em;color:#666;display:block;margin-top:1em;}a.ask-tia-citation-link:hover{color:#11628d !important;background:#e9f6f5 !important;border-color:#11628d !important;text-decoration:none !important;}@media only screen and (min-width:768px){a.ask-tia-citation-link{font-size:11px !important;}}

🔗 Source: Bloomberg

🧠 Food for thought

1️⃣ China’s EV industry is transitioning from subsidy-driven growth to market-driven consolidation

The current price war represents a predictable phase in China’s EV market evolution, following a similar pattern to other maturing industries.

When government subsidies began phasing out in 2018, BYD saw a 31.6% decline in net profit despite increasing sales, as operating margins shrank from 5.8% to 3.3% 1.

The trend has accelerated, with 2024 marking the first year where more EV brands exited (16) than entered (13) the market, signaling the beginning of what analysts call “massive consolidation” 2.

The average production utilization rate in China’s automotive industry sits at just 49.5%, creating unsustainable pressure on manufacturers to maintain operations while competing on price 2.

This consolidation pattern is consistent with historical transitions in other automotive markets where early proliferation of manufacturers eventually gave way to a handful of dominant players as market efficiency demands increased.

2️⃣ BYD’s dual pricing strategy enables aggressive domestic competition while maintaining profitability

BYD’s ability to lead the price war stems from a sophisticated global pricing strategy that balances domestic market share growth with premium international positioning.

While cutting prices dramatically in China, BYD maintains significant markups in foreign markets. For instance, the Atto 3 sells for approximately $19,283 in China but commands $42,789 in Germany 3.

This price differential allows BYD to sustain profitability despite domestic price cuts of up to 30% on models like the budget-friendly Seagull compact car, which now sells for just 55,800 yuan ($7,750) 2.

BYD’s vertical integration, controlling everything from battery production to manufacturing, provides cost advantages that smaller competitors cannot match, allowing it to withstand margin pressure 3.

The strategy reflects a deliberate balance: using aggressive pricing to eliminate domestic competition while simultaneously building a premium brand image internationally that can support higher margins.

3️⃣ Chinese consumers’ shifting preferences are driving market volatility beyond price competition

The price war is occurring against a backdrop of fundamental changes in consumer behavior that create additional challenges for manufacturers.

Chinese car buyer loyalty has plummeted, with only 12% indicating they would repurchase the same brand, creating a market where specifications and price matter more than brand attachment 4.

This low brand loyalty is particularly significant given that 45% of Chinese consumers now plan to buy battery electric vehicles as their next purchase, representing a massive pool of customers in play 5.

The consumer shift is also affecting purchase timing, with social media reports showing people hesitating to buy vehicles when they expect prices to drop further—creating a deflationary spiral that further pressures manufacturers 2.

This combination of high purchase intent for EVs but low brand loyalty creates a challenging environment where manufacturers must constantly adjust pricing to attract consumers who are increasingly sophisticated and price-sensitive.

Recent BYD developments

……