"Price butcher" BYD

Just after the Spring Festival in February 2024, BYD issued cards in succession, and cut prices in ten consecutive hits in 15 days, making competitors "dumbfounded". Some people joked about this, "BYD 'flipped the table'!" Wuling Automobile, Changan Qiyuan and other traditional car companies, as well as Nezha Automobile among new energy car companies, were forced to follow up and cut prices one after another. Hyundai even openly sang the opposite tune in response to the war, shouting the slogan "oil is stronger than electricity". This situation is similar to the price war launched by Tesla in early 2023.

However, when the "price hand-to-hand war" of Chinese car companies is in full swing, the European and American markets have successively reported the news that new energy vehicle projects have failed to sink into the sand. On February 22, Ola Kllenius, chairman of the board of directors and CEO of Mercedes-Benz Group AG, revealed that because the popularity of electric vehicles did not meet expectations, the company decided to adjust its original goal, retract its plan not to launch fuel vehicles in 2030, abandon full electrification, and continue to develop internal combustion engines; Williams) suddenly announced that Apple would halt a decade of car-making efforts and turn its course to "All in AI" (all-in AI), after Apple had already spent tens of billions of dollars on car projects.

In addition, the production of electric vehicles and batteries by internationally renowned automakers such as Volkswagen and Ford has also been postponed or slowed down, which is in stark contrast to the situation of Chinese automakers "going big and fast". What are the factors behind the advance and retreat that play a decisive role?

Photo/Visual China

"Price Butcher"

Why does BYD play the role of "price butcher"?

There are many reasons for this, but the most critical reason should be to boost sales to meet this year's sales target, and at the same time, it is also a means to seize market share from competitors. After an astonishing performance of 3,024,400 units in 2023, BYD's ambitions have become even greater. According to numerous news circulating in the market, BYD's "scheduled" sales target for 2024 has been raised by 50% again, reaching a somewhat jaw-dropping 4.5 million units.

To achieve this "ambition", it is obvious that BYD's appetite can no longer be satisfied by relying only on the new energy vehicle market. For BYD, it is imperative to seize the market share of fuel vehicles. According to the China Association of Automobile Manufacturers, China's new energy vehicle sales will reach 9.495 million units in 2023, a year-on-year increase of 37.9%, and the market share will reach 31.6%, which means that the market share of fuel vehicles is still close to 70%, and this is the "big cake" that BYD has been peeking at for a long time.

In the past year, compact cars have dominated the sales list of cars in the Chinese market, which shows that the current Chinese consumers have a very huge demand for cars in this price range, among which the sales of Nissan Sylphy, Volkswagen Lavida and Sutar are ranked first, second and fourth respectively, and the annual sales of these three sedans alone exceed 1 million. BYD has reduced the price of Qin PLUS to less than 80,000 yuan this time, and the target of the attack is the compact cars of these joint venture fuel car companies.

So why can BYD play the role of price butcher? The most direct factor comes from the sharp drop in battery costs. Batteries account for about 30% of the cost of new energy vehicles, and BYD mainly uses self-developed and self-produced blade batteries, which use lithium iron phosphate technology, and each ton of lithium iron phosphate needs about 0.25 tons of lithium carbonate. Since 2023, the price of lithium carbonate has fallen sharply, from nearly 600,000 yuan/ton at the peak all the way to below 100,000 yuan/ton at present, and the price of lithium iron phosphate has shown the same trend.

Due to the vertical integration of the industrial chain model, BYD can directly and completely harvest the cost advantages brought by the decline in battery raw materials, making it more room for the price reduction of new energy vehicles.

Economies of scale

BYD's performance in the Chinese market is also a microcosm of the competitiveness of China's new energy vehicle industry in the global market, and their magic weapon for success can be explained from an economic perspective as "scale effect".

"Scale effect", also known as "economies of scale", is generally used to describe the increase in economic efficiency due to the increase in scale, and the factors behind this result include specialized division of labor, stronger negotiation power, fixed cost allocation, learning effect, and network effect.

For individual enterprises, the most direct "scale effect" comes from the cost sharing effect brought about by the expansion of production scale. Generally speaking, when a model accumulates enough sales, it can largely amortize the cost of R&D, procurement, molding, etc. For example, BYD's main models such as Qin PLUS and Han, because the sales volume is large enough, the cost of R&D and molds may have been apportioned, and only need to bear the new raw material costs, which has a great cost advantage over competitors. And the larger the sales volume, the greater the purchase volume, the stronger the bargaining power with the supplier, and the lower the procurement cost, which also leaves enough space and confidence for BYD's price reduction.

In addition to the direct cost impact on individual firms, there are many other benefits to "economies of scale". From the perspective of the practice of China's new energy vehicle industry, we should pay special attention to the "scale effect" of market demand and the "scale effect" of the supply chain.

First, let's look at the "scale effect" of market demand. China has a unique inherent advantage, that is, a unified large market. According to the White Paper on the Development of China's New Energy Vehicle Industry (2024) released by EVTank, a research institution, global sales of new energy vehicles will reach 14.653 million units in 2023, of which 9.495 million units will be sold in China, accounting for 64.8%. A unified market and strong demand will stimulate supply and innovation in firms.

There is a view that the rapid development of China's new energy vehicles is inextricably linked with the government's support. Realistically speaking, in the early stage of the development of this market, the government through public transportation orders, urban pilots and consumption subsidies, etc., incubated and created a lot of early demand, but with the development of the industry and the continuous innovation of enterprises, now China's new energy vehicle industry has already entered the track of independent development, and the role of the government has been greatly reduced.

In addition, for the new energy vehicle industry, the "scale effect" also has a great benefit, that is, the "scale effect" of supporting facilities. Taking charging piles as an example, if enough consumers buy new energy vehicles, the utilization rate of charging piles will naturally increase, and the operators of charging piles will have an incentive to build and operate more charging piles after obtaining good economic returns. This is a great convenience for buyers of new energy vehicles, and it will also motivate other potential consumers to buy new energy vehicles. This can be seen from the acceleration of the electrification of taxis and ride-hailing, as well as the acceleration of the construction and operation and maintenance of infrastructure such as charging piles.

Secondly, the "scale effect" of China's new energy vehicle industry supply chain is also very significant. As the supply chain network grows, the internal division of labor will become more specialized. After more than 20 years of efforts, China's new energy vehicle supply chain has concentrated almost the world's best suppliers, whether in the core three-electric (battery, motor and electronic control) field, or in the field of intelligent equipment (intelligent cockpit, assisted driving, information communication and environmental perception equipment, etc.), or in the field of automobile design and development, trial production engineering, vehicle integration and new automotive materials, among which the output of power batteries represented by CATL and BYD accounts for more than 75% of the world.

Even if you don't have rich experience in car manufacturing, you can also accumulate experience and skills through learning by doing, and at the same time accumulate more and wider consumer demand and product quality information in the process of product sales and after-sales service, and reverse promote and update iterative upgrades such as product design, supply chain management, production processes and processes, so as to further enhance the overall competitiveness.

Overtaking in corners

The "scale effect" has brought huge dividends to China's new energy vehicle companies, and also made China's auto industry achieve "corner overtaking" in the global competitiveness.

So why is the United States and Europe, as old automobile powers, wandering melancholy on the road of new energy vehicles, and now there is more intention to "turn the head of the car"? This can be understood from the perspective of the lack of "scale effect" on the opposite side of "scale effect".

Take Mercedes, for example. Mercedes-Benz, as a veteran luxury car manufacturer, has always had a positive attitude towards new energy vehicles, and in 2021 put forward a "full electric" strategy, its goal is to reach 50% of the sales of pure electric and plug-in hybrid models by 2025, and each newly released model will launch a pure electric version, and plans to start from 2030, Mercedes-Benz will basically transform into a pure electric vehicle enterprise.

In the European market, electric vehicles will only account for 11% of Mercedes-Benz's sales in 2023, and only 19% of hybrid model sales, and it will be difficult to achieve 50% in 2025. In the face of difficulties, Mercedes-Benz did not rise to the challenge, but chose the policy of strategic contraction, no longer adhering to the goal of all-electric, but continued to develop internal combustion engines.

Mercedes-Benz's situation is related to the acceptance of new energy vehicles in the European market. From the market feedback, European consumers have a series of complaints about new energy vehicles, such as the range of the car, safety and the car itself is too expensive, etc., they also believe that there is uncertainty in the technological development of electric vehicles, the technology iteration is too fast, and the depreciation of electric vehicles is too fast; in addition, the infrastructure of new energy vehicles in Europe is not sound, the popularity of charging piles is not high and the maintenance status is not an important factor hindering their purchase.

These factors have led to a lack of sufficient demand for electric vehicles in Europe, which will certainly not be able to motivate automakers to develop and manufacture in this area. Obviously, the lack of "scale effect" on the demand side is an important reason hindering the development of new energy vehicles in Europe.

According to the latest report of the Financial Times, Volkswagen of Germany believes that the high manufacturing cost of electric vehicles (especially batteries) is the biggest obstacle to the acceptance of new energy vehicles by European consumers, and there are very few electric vehicles priced below 30,000 euros in the European market.

For decades, cultivating China's own automobile industry, developing national brands, and enhancing the ability of independent research and development and independent innovation have always been the aspirations of many Chinese. But in the era of fuel vehicles, China's desire has been hitting a wall. China, which has the world's largest auto market, has become a big cake for overseas car companies.

We always wanted to catch up and overtake in the corners, but it didn't work out until two new factors came along. One is the emergence of new energy vehicles, and the other is the rise of private automobile enterprises. Starting from entering the fuel vehicle market, Chinese car companies quickly grasped the general trend of new energy vehicle development, continued to seize the market share of competitors through technology iteration and price wars, and began to enter overseas markets to compete head-on with the world's leading car companies.

If we can maintain a level playing field for a long time and let the most efficient car companies win, then corner overtaking will no longer be just a desire of the Chinese.

(The author is Professor of Economics and Vice Dean for Asian Markets, Cheung Kong Graduate School of Business)

Author: Li Wei

Editor: Min Jie