Tesla, Li Auto Cut Prices, Shares Dip Amid EV Battle

Key Takeaway

• Tesla and Li Auto announce significant price cuts in key markets, with Tesla's Model 3 reduced by 14,000 yuan in China.
• Following the price cut announcements, Li Auto's shares dropped 8.3%, indicating market sensitivity to EV pricing strategies.
• Tesla faces a 40% operating profit drop and its first revenue decline in four years amid increased competition and market share loss in China.

Price Cuts Amid Competition

Tesla and Li Auto, two prominent electric vehicle (EV) manufacturers, have recently announced significant price reductions across various markets, including China, the United States, and Europe. Tesla reduced the starting price of its Model 3 in China by 14,000 yuan ($32,000), marking a strategic move to bolster its competitiveness. Similarly, Li Auto announced price cuts for several models, including the L7, L8, L9, and the newly launched MEGA SUV, with reductions reportedly up to 30,000 yuan. These adjustments reflect the companies' responses to the intensifying competition within the EV sector, particularly in China, where local automakers are vying to surpass Tesla with advanced technology and competitive pricing.

Market Reactions and Strategic Implications

Following the announcement of the price cuts, shares of Li Auto fell by 8.3% to an 11-month low, with other Chinese EV makers like Nio, Xpeng, and BYD also experiencing declines in their stock values. The price reductions are part of a broader strategy by EV manufacturers to navigate a highly competitive market landscape. Eugene Hsiao, head of China equity strategy at Macquarie Group, highlighted the goal of China's biggest EV makers to dethrone Tesla in what he described as the most competitive domestic auto market in recent history. The price cuts are seen as a tactical move amidst a broader wave of industry consolidation, with companies like Xiaomi entering the EV market with competitively priced offerings.

Financial and Operational Challenges

Tesla's decision to lower prices across key markets comes in the wake of disappointing first-quarter sales and growing inventory levels. The company is expected to report a 40% drop in operating profit and its first revenue decline in four years. CEO Elon Musk has initiated the company's largest layoffs to date and is focusing on the development of a next-generation, self-driving vehicle concept known as the robotaxi. In China, Tesla's market share decreased to approximately 6.7% in the fourth quarter of 2023, from 10.5% at the beginning of the year. Additionally, production schedules at Tesla's Shanghai factory have been scaled back, and shipments from this plant have declined in the first two months of the year.

Street Views

• Eugene Hsiao, Macquarie Group (Neutral on Tesla and Chinese EV makers):

  "All of China’s biggest EV makers have one goal in mind — taking the crown from Tesla," while noting that it is the most competitive domestic auto market in recent history. "The price discounts were just one facet of a variety of strategies that big EV players in China are using to survive the coming wave of industry consolidation."