BYD Discounts Show China’s EV Price War Is Worsening

f(2t9(g2)sr]m(3ovdc}2e}t_media_dl_2.png Bloomberg Intelligence

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(Bloomberg) — China’s efforts to cool its automotive price war are faltering as BYD Co. and rivals expand discounts to avoid ceding ground in the world’s largest car market.

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The average price reduction for BYD cars accelerated to 10% in March, the highest in two years, according to China Auto Market data compiled by Bloomberg. Discounts by competitors such as Geely Automobile Holdings Ltd. and Chery Automobile Co. have also edged higher, according to the data. 

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It’s a sobering reminder of the intense competition and overcapacity overshadowing China’s car market as the Beijing auto show gets underway this week. Facing severe pressure on margins at home, BYD, Geely and other Chinese carmakers have increasingly sought out growth in overseas markets, ranging from Brazil and the UK to Australia and Canada. Regulators’ missives aimed at halting deflationary momentum have fallen on deaf ears so far, and industry observers say it won’t stop the discounting trend anytime soon.

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“Price competition will always exist,” said Yale Zhang, managing director of consultancy Automotive Foresight. “It won’t go away this year or the next.”

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Almost a year ago, Chinese authorities convened the heads of more than a dozen major electric vehicle makers to bring about a ceasefire in the price war, warning them not to sell cars below cost or to offer unreasonable discounts — something officials have done at least three times this year. Last year’s meeting also covered issues such as “zero-mileage” used-car sales and slow-walking payments to parts suppliers.

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Days later, BYD Chief Executive Officer Wang Chuan-Fu, who’s been dubbed China’s Henry Ford, fought back tears during an investor meeting when discussing “short-term pressures” facing the company and being “misunderstood.” 

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Famously backed in its early days by legendary investor Warren Buffett, BYD is at the center of attention because of its position as the industry leader — even as its sales in China have slid for the past seven consecutive months.

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In response to stepped-up scrutiny from Beijing, the manufacturer of Song SUVs and Atto crossovers has had to pay parts makers faster than its peers and can no longer deploy discounts as easily to stimulate sales, according to suppliers familiar with the situation, who asked not to be identified discussing private matters.

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Specifically, the carmaker has been shifting away from an IOU-based system that allowed it to delay invoice fulfillment for months at a time — and has fueled an increase in payments with interest-bearing debt, according to the people. That, in turn, has loaded up BYD’s balance sheet with liabilities and pushed its net debt-to-equity ratio to 25%, after having been negative for the past four years.