China's EV Market Faces Brutal Test After BYD's Aggressive Price Cuts

The world’s largest auto market is in trouble, and it’s taking some of its noted electric vehicle (EV) makers down with it. Shares of Chinese EV companies took a sharp hit recently, rattled by growing fears of a deepening price war and rising regulatory concerns. BYD Co Ltd. BYDDY plunged more than 9% yesterday to close at $107.33, while NIO Inc. NIO, XPeng XPEV, and Li Auto LI also ended the day in the red, down 3.4%, 3.3%, and 2.3%, respectively. This didn’t seem like just another bad day—it looked like a sign of bigger trouble ahead.

BYD's Big Move Sparks Fresh Market Jitters

At the center of the storm is BYD, China’s EV juggernaut. On the surface, its latest move looks like a gift to consumers—price cuts on 22 electric and plug-in hybrid models until the end of June. Its budget-friendly Seagull hatchback now starts at just 55,800 yuan (about $7,765), and the sleek Seal dual-motor hybrid sedan saw its price slashed by a whopping 34%, now starting at 102,800 yuan. Earlier this year, BYD rolled out cheaper versions of its Han sedans and Tang SUVs, trimming prices by over 10%.

BYDDY carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

But this aggressive pricing strategy comes at a cost. With razor-thin margins and intensifying competition, China’s EV industry is caught between growth and profitability. BYD’s price cuts might boost volumes, but they’ll undoubtedly squeeze profit margins. And that’s not just for itself; the price war will likely erode margins for every other player trying to stay in the race.

Can NIO, LI & XPEV Sustain Margins?

Li Auto saw its vehicle margin slip from 22.7% in the fourth quarter of 2023 to 19.7% in the fourth quarter of 2024. That’s a red flag in a market where efficiency and pricing power are key to survival. NIO, on the other hand, has worked to improve its vehicle margins and even set a goal of hitting 20% for its namesake brand this year. But with BYD dragging prices down across the board and others likely to follow suit, that target suddenly looks overly ambitious.

Then there's XPeng. While it managed to nudge its vehicle margin up from 10% in the fourth quarter of 2024 to 10.5% in the first quarter of 2025, the sustainability of that progress is questionable. XPeng, like NIO, still isn’t profitable, and every yuan shaved off car prices pushes breakeven further out of reach. NIO has publicly aimed to reach profitability by the end of 2025, but with this stiff pricing competition, that goal gets murkier.

Industry Shakeout Looms

Retail discount levels remained elevated in the January-March 2025 period, and all signs point to a prolonged price war. The latest price cuts from BYD are likely to erode the market share of smaller and weaker competitors—unless they respond in kind, which would only deepen their losses. It’s a vicious cycle that will test the resilience of the entire sector.

Pressure is increasing on the supply chain too. Wei Jianjun, chairman of Great Wall Motor, didn’t mince words last week. He compared the auto industry’s current state to China’s property crisis, suggesting that EV makers are pushing suppliers to the brink by demanding lower costs and delaying payments.

The promise of China’s EV boom lured in a wave of startups over the past decade. But many are now stuck in a price war that’s undercutting profitability. NIO, XPeng and Li Auto all carved out niches with advanced tech and smart driving features, but even those are now being bundled into base models at no extra cost. The premium edge is fading fast.

And it’s not just market dynamics causing headaches. China’s state planner recently issued a warning about excessive competition in some sectors, flagging concerns about companies selling cars below cost and undermining fair competition.

BYD’s latest round of cuts could well be the tipping point. It’s forcing NIO, Li Auto, and XPeng into a dangerous game of catch-up. If margins continue to shrink and losses pile up, we could see an industry shakeout sooner than later.

As earnings from Li Auto and NIO roll in over the coming days—following XPeng’s already-released first-quarter numbers—the market will be watching closely. One thing is clear—China’s EV market is entering a challenging new phase. Growth opportunities remain, but navigating pricing pressure will be critical.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research