BYD leads aggressive discounting shakes China’s auto market amid fears of industry meltdown

China’s electric vehicle (EV) industry is spiralling into a new phase of disruption as a brutal price war, led by market giant BYD Co., forces automakers into unsustainable discounting strategies.

Despite surging vehicle sales, the industry faces a sobering reality: profits are thinning, weaker players are folding, and Beijing is stepping in to curb what it now calls “rat race competition”.

BYD delivered nearly 382,500 vehicles in May, its best monthly performance of the year, yet the company’s stock continues to plunge. In just the past week, its Hong Kong-listed shares dropped another 5 per cent, following a steeper 15 per cent decline earlier.

The paradox of rising sales and falling share prices highlights the mounting strain from relentless discounting that has gripped China’s EV sector over the past two years.

Other major EV players, including Xpeng, Geely, and Leapmotor, are slashing prices in a bid to stay relevant. Price cuts across various models have reached up to 34 per cent, with compact models like BYD’s Seagull now retailing for as little as 55,800 yuan ($7,750).

The broadening scope of price reductions is beginning to mirror the intensity of earlier price wars in China’s overheated real estate market, an ominous parallel noted by several industry veterans.

While Chinese consumers initially benefitted from more affordable electric cars, the long-term risks are becoming more visible. Frequent and unpredictable pricing has begun to erode consumer trust, with many buyers hesitating in anticipation of further price cuts. Dealerships in several provinces have already gone under, and concerns are mounting over deteriorating service quality and thinning after-sales support.

Mounting overcapacity and shrinking margins

A key driver of the ongoing crisis is massive overcapacity. China’s EV makers are collectively operating at under 50 per cent production capacity, with too many players chasing too few consumers in a saturated domestic market.

Although the number of new energy vehicle (NEV) manufacturers has begun to shrink—2024 marked the first year exits outpaced new entrants—the industry remains bloated and fragmented.

Even as Chinese automakers shift their focus to exports to absorb excess production, foreign markets are tightening. The US has effectively shut its doors to Chinese EVs with 100 per cent import tariffs, while Japan and South Korea are reportedly weighing similar measures.

Meanwhile, Europe’s recently imposed tariffs have yet to dent Chinese competitiveness: BYD outsold Tesla in the EU for the first time in April.

Beijing is increasingly concerned. Authorities summoned major automakers to the capital last week, urging them to stop selling vehicles below cost and to avoid irrational pricing.

Regulators also voiced concern about “zero-mileage” cars being sold as second-hand, a tactic used by some companies to inflate sales numbers. Yet this is not the first time policymakers have tried to rein in the sector. A 2023 industry pact to end price wars collapsed within days due to antitrust concerns, and discounting resumed unabated.

Profitability under pressure, even for industry leaders

Despite its dominance, BYD is not immune to the fallout. While the company posted a 49 per cent increase in annual net profit last year, analysts now estimate its true net debt may be far higher than reported—possibly over 323 billion yuan ($45 billion), based on supply chain finance arrangements that have come under scrutiny.

Meanwhile, even well-established brands are being forced into strategic pivots. Geely-backed Zeekr and others are increasingly offering advanced driver-assist features for free, effectively using software to differentiate instead of further lowering prices. However, such moves may not be enough to offset the heavy toll of operating in an environment where margins are being relentlessly compressed.

The average car price in China has fallen nearly 19 per cent over the past two years, with battery-only EVs seeing a 21 per cent drop and hybrids down 27 per cent. This deflationary trend sharply contrasts with rising car prices in markets like the US, where average EV prices now exceed $59,000.

For now, China’s EV industry continues to produce and sell at scale, but the path forward looks increasingly precarious. Without a sustained rebound in consumer demand or meaningful industry consolidation, the sector’s growth may continue to mask deeper structural imbalances. Beijing’s calls for “self-regulation” may not be enough to restore order in a market where scale, price, and survival are tightly intertwined.