New Insights on Spillover Effect of Tesla’s Abrupt Price Hikes on Chinese New Energy Vehicle Market

Recently, global EV leader Tesla unexpectedly announced price hikes, which came after its several rounds of price cuts since the beginning of this year. Does this signal the new energy vehicle (NEV) market is beginning to recover?

Shortly after Tesla hiked the prices of its Model 3 and Model Y by 2,000 yuan/mt, it raised prices of Model S and Model X by as much as 19,000 yuan. The price hike not only targets the Chinese market, but also the US and Japanese markets.

Price cuts by Tesla triggered price war in the Chinese NEV market early this year, which subsequently spilled over into the gasoline-powered car market.

However, amidst the ongoing price war, Tesla took the market by surprise with its price hikes. Here is the motive behind its move.

To cope with lower-than-expected delivery growth last year and collapse of its stock prices, Tesla intended to promote sales via price cuts early this year. This move did have a positive impact on its deliveries, which exceeded 420,000 units in the first quarter this year, soaring 36% YoY.

However, the gross profit margins of its auto business fell 11.8% YoY. This may be one of the reasons why it decided to raise its car prices.

Another reason may possibly be that the entire industry will suffer a lot, should the price war drags on. One media reported that price cuts by Tesla not only hurt itself, but also its competitors. Competition will no longer exist when Tesla is able to reduce costs through technical progress while others have to follow Tesla in cutting prices at the expense of their profit margins.

If the price war severely hits the domestic car industry, it may not be easy for Tesla to obtain additional support from the government.

Nevertheless, even if the price war is over, the NEV market may not recover rapidly as the deeply rooted problem – weakening global demand, has not been resolved.

Moreover, lithium carbonate prices have stabilised and even rebounded slightly after several consecutive months of drastic declines, which will put cost pressure on battery and car makers.