Opinion: Tesla is no longer the top electric-vehicle maker, as China turns EVs into commodities. Has peak Tesla arrived?

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Tesla Model 3 vehicles at a factory in Shanghai, China, on Jan. 7, 2020.Aly Song/Reuters

Making cars was always a commodity business, with low profit margins and fairly frequent bankruptcies and rescue mergers in a competitive market stuffed with bland, similar products. Tesla’s Elon Musk changed the game by rolling out a novel machine – an all-electric vehicle – that he could sell at an outrageously high price. For a decade or so, he owned the high- and medium-end EV market, and the company’s market value, which once surpassed US$1-trillion, showed the magic formula was all his.

Then came China, which knows a thing or two about copying winning products and pumping them out like rubber duckies at unbeatable prices. That strategy proved a winner once again with EVs. In the last quarter of 2023, China’s BYD, which is backed by Warren Buffett, dethroned Tesla TSLA-Q as the world’s No. 1 EV maker. It delivered 526,000 electric passenger cars; Tesla’s tally was 484,000. BYD’s next job is to dominate the export market for low- and medium-priced battery-powered cars.

The relentless rise of Chinese EV production is bad news for Tesla, potentially trapping it in a narrowing middle market. To compete with the onslaught of cheaper Asian and European EVs, Tesla has rolled out lower-priced machines, like the Model 3, and heavily discounted older products, like the Model S, damaging its once-hefty profit margins. Meanwhile, the luxury EV market, where Tesla made its first splash, is getting crowded, too, with German EVs (BMW, Mercedes, Porsche) commanding extraordinary prices. The Porsche Taycan starts at US$92,550, and the top model goes for double that price.

Has peak Tesla arrived?

Perhaps, in terms of market share, if not market value (BYD is worth a tenth of Tesla). The mass market is moving away from Tesla, which raises the question: should the company have stuck with luxury EVs?

China’s potential dominance of the mass EV market now looks likely. Well more than a decade ago, the country figured out that batteries were the future and quietly bought up the global supply chain of EV materials. According to the International Energy Agency, Chinese companies process more than half of the world’s lithium, two-thirds of its cobalt, one-third of its nickel and more than 70 per cent of its graphite. Three-quarters of all lithium-ion batteries, the main source of power for today’s EVs, are made in China, mostly by BYD and rival Contemporary Amperex Technology,

At some point, BYD figured out that building the entire car wouldn’t take much more work. Its rise has been astounding, as the company has overtaken Honda, Toyota and Volkswagen to become the best-selling auto brand in China. In the global industry, it has the best return on invested capital and returns on equity, according to Bloomberg. We can assume Mr. Musk is not amused.

The next stop for BYD is the export market. Already, about 10 per cent of its EVs are sold overseas, up from 2.5 per cent a year and a half ago. Its sales are set to surge as it builds factories to take advantage of various governments’ plans to ban the sale of cars with tailpipe emissions after 2035 or so. Hungary is getting one, and Mexico is reportedly being sized up for a plant that would supply Latin America (the United States’ 27.5-per-cent import tariff on Chinese-made cars has all but eliminated them from that market).

If BYD’s domestic success is replicated overseas, Tesla and other Western automakers stand to lose alarming dollops of market share for inexpensive EVs – maybe medium-priced ones, too, if BYD becomes more ambitious. Making cheap EVs is already turning into a commodity business. The high end of the market is where the fat margins will be earned, and this poses a dilemma for Tesla. Should it launch luxury models, as it did when it came out of the gate a dozen years ago, or compete in the mass market? The company is reportedly planning to build its most affordable car, with a price tag of about US$27,000, at its new Berlin factory.

The Chinese know how to make appliance EVs. They do not know how to make high-performance, luxury EVs, where the software, not the battery, is the prime selling feature. Wealthy EV drivers of the future will want cars that are rolling computers with machine-learning capabilities. They might plan journeys, monitor charging stations to find the ones with the cheapest electricity prices, operate as mobile offices, provide electricity to homes during times of peak demand or offer full self-driving capabilities. If these features are added to an EV with a reputation for quality and a glorious racing heritage, like a BMW or a Mercedes, rich drivers might pour into showrooms.

Tesla could have remained a builder of top-end, luxury EVs that are loaded with dazzling software and are as fast or faster than Porsches or Ferraris. Instead it risks losing that market to the German auto companies just as BYD and others pile into the cheap end. The squeeze is on, and Mr. Musk may need a new strategy soon, as every segment of the EV market is getting cluttered fast.

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