China’s electric car drive, led by BYD, leaves global brands behind

SHANGHAI (Reuters) – China’s auto market, the world’s largest, is accelerating toward an electric future – leaving established global brands stuck in the slow lane.

When auto executives convene in Shanghai for the auto show starting Tuesday, they will return to a sharply different market from the one they left in 2021 when the industry gathered for a limited event under strict COVID-19 controls.

The biggest change: China-made brands now lead in key segments and their rise has been powered by new electric-drive models that are gaining share at home and overseas.

The biggest winner has been BYD, which will use the Shanghai show to unveil a new hatchback electric vehicle (EV) for value-seeking buyers and a pricier EV styled as an SUV.

BYD’s sales in China are up almost 69% this year, giving it an 11% share of the overall car market, more than Volkswagen (ETR:) or Toyota, according to an analysis of sales data.

“The stratification of this market into clear winners and losers is becoming clear,” Bill Russo, founder of consultancy Automobility said in a note issued on Tuesday. “And there are very few winners and a whole lot of losers.”

China’s passenger car sales were down 13% in the first quarter, data from the China Passenger Car Association show.

But sales of EVs and plug-in hybrids – an area where Chinese automakers led by BYD now dominate – were up 22%. Sales of internal-combustion vehicles were down by an almost equal margin.

The result has been a double whammy for the likes of Volkswagen, General Motors (NYSE:), Honda and Nissan (OTC:). Sales are down and so is market share.

More than 40 auto brands have followed Tesla (NASDAQ:) in cutting prices on EVs since January in a price war that has supported sales of EVs and plug-in hybrid electric vehicles (PHEVs), both of which are classed as “new energy vehicles” in China. It has also cut into industry-wide profitability, analysts say.

THE ‘FINAL BASTION’ FOR COMBUSTION

For years, China’s entry-level market for passenger cars was dominated by combustion-engine cars made by global automakers in partnership with Chinese brands.

But for cars priced between $22,500 and $30,000, this year has been a wipeout for gasoline-only vehicles. Sales were down 20.5% in the first quarter, compared to a 68% gain for EVs and plug in hybrids.

BYD’s Song plug-in hybrid SUV, with a starting price of about $20,000, outsold the Nissan Sylphy, which had been China’s top-selling car for three straight years. BYD’s Dolphin EV, which starts at about $17,000, was ahead of the Volkswagen Passat.

Because of the cost pressure on EVs from battery materials, the entry-level market is likely to be “the final bastion” for gasoline-only vehicles in China, Xu Haidong, deputy chief engineer at the China Association of Automobile Manufacturers said.

In China’s premium market, with prices between about $52,500 and $60,000, electric-drive cars are already the best sellers.

BYD dominates China’s market for plug-in hybrids, cars that have a combustion engine but are capable of being charged and running for shorter distances on electric power.

Plug-ins represent more than half of BYD sales this year, giving the company scale to compete on price across its line-up, analysts say.

TESLA’S ‘HEART AND LUNGS’

Tesla saw a 27% increase in Chinese sales in the first quarter to just over 137,000 of its Model 3 sedans and Model Y crossovers. Tesla also increased share after cutting prices in China by between 6% and almost 14% in January.

That put starting prices for Teslas in China between $7,500 and about $10,700 lower than current U.S. prices, which have also been discounted.

Analysts and investors will focus on what that means for margins when Tesla announces first-quarter results on Wednesday.

“Gaining further share in the key China market will be the hearts and lungs of the Tesla growth story,” Wedbush analyst Daniel Ives said in a note on Monday.

In a further threat to established brands, China’s exports are growing fast, led by EVs and PHEVs. Industry-wide exports from China were up 83% last quarter from a year earlier.

BYD, which markets its cars in Europe and Southeast Asia, had a 13-fold increase in exports from China.