Is Chinese electric car maker BYD poised to eat Tesla’s breakfast?

Chinese electric vehicle maker BYD Co. [002594.SZ] kicked off the year reporting strong quarter car sales, for the first time pipping Tesla NASDAQ:TSLA to the post of the world’s largest EV maker.

Crucially, BYD grew its sales in China, the world’s largest EV market, to 21% of the market compared with Tesla’s increase to 12%. The Shenzhen-based company forecasts net profit for the July to September period at between 9.55 billion yuan ($1.31 billion) and 11.55 billion yuan, an increase of 67% to 102% from a year earlier. BYD’s nine-months net profit is expected to be between 120-140% higher than a year ago.

Don’t write Tesla off just yet

It would be a step too far to write off Tesla, one of the world’s most favourite stocks with strong growth prospects and it is far better capitalised than its Chinese rival, and yet the Chinese car maker backed by Warren Buffett is beginning to eat Tesla’s breakfast. BYD has two key advantages over its US competitor.

For one, BYD’s cars are much cheaper. While Teslas are sold for around $45,000 BYD cars sell at around $37,000. Secondly, BYD has its own in-house car battery production while Tesla depends on an outside supply chain for lithium car batteries that is very sensitive to price swings. For the moment, Tesla is ahead in the preparations for automated driving but later in January BYD is holding an open day and will update on its plans in this sector.

• New European defence ETFs launched as budgets increase
• Podcast: Blockchain investments for beginners with WisdomTree’s Blake Heimann
• Short of the Week: Can rudderless Tesla stock break under $200?

BYD dominating the Chinese market

Over the last two years the key battleground for the two companies has been the Chinese market where BYD has picked up about 14 percentage points of market share since 2021. While Tesla’s car sales are showing solid growth in China the car maker can’t compete with BYD which has 11 times more distributors across its home market.

Having secured its dominance in China, BYD has set its sights on becoming the number one EV seller in Europe with plans to build a major new factory in Hungary. The carmaker wants to significantly boost sales in Europe to account for up to 10% of all EV sales there by 2030, equal to around 800,000 vehicles a year.

China has laid the foundation for good will by financing a major high speed rail line across Hungary and the country’s President Orban is keen on the BYD factory being built as it would employ thousands of local workers alongside Chinese workers. But European Commission President Ursula von der Leyen has already hinted that the EU might increase its tariffs on Chinese cars over the coming years, up from the already existing 10% tariff. The situation in the US is similar, with tariffs on Chinese EV imports as high as 27.5%.

A date for your diary

A date to put in the diary is 24 January when Tesla will report its full year results after markets close while BYD will hold an open technology day.

Although BYD and Tesla have different strategies for growth they are financially very similar. BYD is primarily looking to increase sales in Europe by building a mega factory, increasing its profits from exports overall and in particular in markets like the rest of Asia and Central Asia where Tesla may have difficulty expanding because of its high price,

Tesla will keep growing the US market, its largest alongside China, and will continue its production in China which is then also sold into Europe; Tesla will keep focusing on automated driving for future high-speed growth.

Still, both companies generated almost identical operating profit in the third quarter of around $1.7 billion and their operating profit margins were just a notch below 8%. Their biggest difference is market capitalization with Tesla stocks being worth $800 billion, or 64 times 12-month forward earnings, and BYD worth around $75 billion, or 13 times. The main reason for that is that the former is traded on US stock exchanges while the later is based in Shenzhen.

Tesla is also traded as part of electric vehicle and green transition thematic portfolios by managed funds and Exchange Traded Funds – more so than BYD where reluctance to buy Chinese shares or outright restrictions play their part.

What does it mean for investors? Both stocks have strong growth prospects for 2024, both companies are expected to increase their sales by over 30% during the year, the only difference is that Tesla is likely to become the world’s second largest car maker rather than the biggest one.

WisdomTree related ETFs