On August 31st, a report by UOB analysts, led by Patrick Hummel, delved into BYD’s latest “Dolphin” electric vehicle, providing insights into BYD’s supply chain, costs, structure, technology, and after-sales service. They concluded:
BYD has a cost advantage of approximately 25% lower production costs in Europe compared to Western automakers and the potential to disrupt global original equipment manufacturers (OEMs). Chinese OEMs can meet the demands of two-thirds of the global automotive market.
Through vertical integration and economies of scale, BYD has achieved cost advantages. The “Dolphin” EV costs 15% less to produce than Tesla’s Model 3, making it approximately $3,400 cheaper. “Dolphin” boasts a gross profit margin of 16% and a profit margin of 5%.
BYD’s competitive cost structure isn’t just due to factors like lower labor costs in China; it also stems from the technology’s sophistication and integration. About 75% of the “Dolphin” EV’s components are produced by BYD, leaving limited space for global traditional suppliers. It relies heavily on China’s local supply chain. Except for Qualcomm’s chips, there are not many overseas-supplied components. The in-house component production rate of the “Dolphin” is higher compared to Tesla’s production in the United States or Volkswagen’s production in Germany.
China’s electric vehicle industry is currently in a phase of vertical integration triggered by domestic price wars. Whoever gains an advantage in integration will become the winner, and the winner will actively pursue a global expansion strategy. This means the “price war” in electric vehicles is likely to extend to Europe, and BYD will become the industry leader.
Chinese car companies’ pricing in the European market is significantly higher than in China. The only explanation is that Chinese automakers have not yet seriously targeted pricing, as they are still in the “testing the waters” phase. Over time, Chinese car companies in Europe will become more competitive. European brands may need to lower prices by 10% to 15% to maintain market share.
It is expected that by 2030, the global market share of Chinese domestic brands will double from the current 17% to 33%. European brands will suffer the most significant market share loss, potentially dropping from 81% to 58%. The impact on the internal combustion engine segment will be more pronounced, with Volkswagen, Renault, Volvo, and Honda facing the most substantial negative consequences.
01 BYD’s Advantages – Bringing the Best Value to Consumers
UOB pointed out in the report that in just a few years, China has replaced Japan as the world’s largest automotive exporter. China’s electric cars are highly attractive to consumers due to: (1) the advantages of scale and cost that bring an extremely high cost-performance ratio; (2) cutting-edge battery technology, power technology, and supply chain; (3) first-class digital user experience (smart cockpit, advanced driver-assistance systems, and other smart devices).
UOB stated that BYD can be seen as a witness to China’s strength in electric vehicles, setting a new benchmark in the global electric vehicle market. To better understand the competitive advantages and supply chain of China’s leading electric vehicle manufacturer, UOB disassembled BYD’s latest “Dolphin” vehicle and conducted a detailed analysis of BYD’s powertrain system, including LFP batteries, E/E electrical and electronic system architecture, and ADAS intelligent driving assistance system. They then compared it with previous disassemblies of Volkswagen’s ID.3 and Tesla’s Model 3.
UOB noted that overall, BYD’s latest “Dolphin” vehicle is cheaper than Tesla’s Model 3, with larger interior space and more luxurious interiors. In contrast to Tesla, BYD’s design goal for the “Dolphin” is not to achieve fully autonomous driving over time, but with its reliable Level 2 system, it meets all the expectations of the budget market for ADAS, along with higher-quality interior materials.
Unlike Volkswagen’s ID.3 and ID.4, the “Dolphin” is fully aligned with consumers’ expectations regarding digitalization, and its interior is more attractive (with a larger screen and superior materials).
As the detailed disassembly analysis showed, BYD leveraged its cost advantage through high vertical integration, resulting in excellent engineering solutions and a cost leadership advantage. While the “Dolphin” is currently being sold in China and some Asian markets, BYD has announced plans to introduce it to Europe in the second half of 2023, where it will compete directly with existing European automakers.
UBS emphasizes that WLTP pure electric range is a crucial factor in determining whether consumers are willing to purchase budget-friendly electric vehicles. In this regard, BYD’s products have their advantages.
The ratio of BYD’s suggested retail price to the electric range stands out in the competition among car manufacturers.
In terms of efficiency (the ratio of WLTP electric range to battery capacity), the BYD Dolphin is at an average level among vehicles in its class. Tesla maintains a leading position thanks to its outstanding aerodynamic design and efficient powertrain systems.
When looking at the details, the BYD Dolphin does not excel in various aspects, including battery, powertrain, advanced driver assistance systems, and E/E architecture. Most of the key performance indicators are at least at a moderate level. However, the key point is that, from a cost perspective, the Dolphin scores high in each of these indicators and is the most cost-effective in its class when it comes to battery cells and electronic components:
In other words, the positioning of the BYD Dolphin is very accurate and can provide the best value for ordinary consumers.
02 BYD’s Cost Advantage
UBS points out that BYD demonstrates a high degree of vertical integration advantage. Approximately 75% of the components in the Dolphin are produced by BYD itself, leaving relatively little space for traditional global suppliers. The Dolphin relies heavily on China’s domestic supply chain. The self-sufficiency rate of components in the Dolphin is higher than that of Tesla, whether it’s produced in the United States, China, or Volkswagen in Germany.
In China, Tesla’s level of vertical integration in battery manufacturing is lower than BYD’s because it relies on suppliers outside China. However, Tesla has a higher degree of integration in ADAS (Advanced Driver Assistance Systems) and software.
When it comes to leveraging China’s cost advantage, both BYD and Tesla can use their Chinese production capacity as a global manufacturing center. Traditional OEMs are usually in joint ventures (typically with ownership stakes of 50% or less), so using Chinese capacity to serve global markets is a financial advantage.
UBS points out that in terms of gross profit, the Dolphin achieves a gross margin of 16%, equivalent to $3,700 per vehicle. In general, higher trim versions with larger battery capacities and all-wheel-drive systems should have higher profit margins because the price difference is greater than the incremental cost. Compared to the Model 3 Standard Range produced in China, the estimated production cost of the BYD Dolphin is about 15% lower:
The battery costs of the two cars are similar (slightly higher for BYD), but BYD has chosen a powertrain and ADAS with lower overall costs (slightly lower performance). On the other hand, Tesla’s assembly labor costs should be slightly lower than BYD’s due to its use of first-rate manufacturing processes and higher factory automation.
Overall, the BYD Dolphin is about $3,400 cheaper in direct costs compared to the Model 3. However, this gap may narrow with the introduction of new versions of the Model 3.
03 Will BYD Create a Storm in Europe?
According to data released by the General Administration of Customs, the amount of Chinese car imports into the European Union in 2022 was $13.3 billion, a year-on-year increase of 100%. According to S&P Global data, by the end of this year, up to one-fifth of the cars imported into Europe could come from China, compared to less than 1% five years ago.
UBS emphasizes that there is no doubt that in markets like Europe, only electric vehicles can gain export market share, and only a few Chinese companies can master the path to global expansion, which is enough to disrupt the global car market.
Recent months have also shown that the rise of Chinese domestic car brands in the global market is not a straight path. We believe that the inevitable price war of Chinese domestic electric cars will lead to industry reshuffling, forcing some electric car manufacturers into a cash flow maintenance state, possibly delaying their global expansion plans, and for some automakers, this situation may be permanent.
It is highly likely that only a few Chinese car manufacturers will successfully take control of the expansion, which is enough to disrupt the global car market.
UBS points out that the current Chinese electric car industry is in a vertical integration stage triggered by a local price war. Those who master the advantage of integration will become winners and actively implement global expansion strategies. This means that electric car price wars are likely to radiate to Europe, and BYD will become the industry leader:
Tesla has already started exporting to Europe, and BYD will also export the Dolphin to Europe, competing with traditional OEM products manufactured in Europe.
Companies like BYD can leverage China’s low-cost supply chain to assemble cars locally in target markets.
We believe that Chinese OEMs can tap into two-thirds of the global automotive market, and given the market size in Europe and clear electric vehicle adoption plans, Europe is the most attractive region globally.
According to our analysis, after deducting EU import tariffs on cars, the cost of producing the Dolphin in Europe by BYD will be about 10% higher than exporting from China. Even with this increase, the BYD Dolphin will still be about 25% cheaper (about $10,000) than equivalent-quality electric models produced by European OEMs.
UBS points out that Europe is currently the biggest opportunity for Chinese domestic electric vehicle companies for several reasons:
Rapid growth in the electric vehicle market due to bans on internal combustion engines (by 2030, the proportion of electric cars will reach 69%, and by 2035, it will reach 100%).
Europe lacks homegrown disruptive companies, only traditional OEMs transitioning to the electric vehicle era at a slow pace.
Highly overlapping with the Chinese niche market, which includes the same vehicle categories (small and compact crossovers and SUVs are the most popular niche markets in both regions).
The cost advantage of Chinese OEMs is difficult (or even impossible) for European OEMs to replicate.
UBS states that according to surveys, for European consumers (and consumers in other regions), the purchase price is the most important decision factor, and Chinese economy-level electric cars are likely to capture a significant share of the European market as it transitions from traditional internal combustion engine vehicles.
It’s also worth noting that in surveys of European electric car purchase intentions, UBS found that while BYD’s market share among Chinese domestic brands remains relatively low compared to existing European brands, it is still the highest. Economic-level electric car brands (BYD, SAIC Group) show more positive momentum compared to high-end electric car brands (such as NIO) among potential buyers in Europe.
UBS points out that when asked about the reasons for considering purchasing Chinese pure electric vehicles, 50% of consumers emphasize “good value for money” as the primary reason. In light of this, UBS believes that the European economy car market is more likely to be impacted by Chinese electric car brands compared to the high-end and luxury markets:
Currently, European domestic car manufacturers offer electric car products starting at 40,000 euros, which is one of the reasons for the relatively low penetration rate of electric cars in the economy car market. Chinese electric car manufacturers and Tesla have the capability to fill this gap, thus promoting the proliferation of electric cars in the European economy car market.
UBS states that Volkswagen, Stellantis’ economy cars, Renault, and others face the greatest threat, while BYD gradually gaining a foothold in the European market could also affect Japanese and Korean car manufacturers:
Overall, the European original equipment manufacturers’ models of the same category are priced $15,000 to $250,000 higher than the Sea Lion.
However, as shown in the figure below, BYD and other Chinese domestic brands’ retail prices for electric cars in Europe have been significantly higher than in China. Our only explanation for this is that Chinese domestic car manufacturers have been in the “testing the waters” phase rather than “pushing aggressively” in the European market. We believe that over time, Chinese OEMs will become more aggressive in their pricing in Europe.
04 Will the European Market Be “Forced” to Start a “Price War”?
UBS’s report analysis states that assuming BYD’s profit remains the same when selling in Europe as it does in China, it can be observed that it is at least $15,000 cheaper than European domestic cars. This situation is unsustainable, and it is expected that Volkswagen will need to significantly lower its prices to avoid losing market share:
Conservatively estimating, with a consistent profit margin, BYD’s Sea Lion price in Europe can be $9,000 higher than in China (including a 10% import tariff, shipping costs per vehicle, additional distribution profits, and the difference between German and Chinese value-added taxes).
This also means that the price gap between BYD and European competitors is substantial. We can see that these models are at least 15% more expensive, and it should be emphasized that these “bare cars” have significantly less interior and smaller dimensions than the Sea Lion (such as the Volkswagen ID.3 or Peugeot e208).
Prices for similar models like the ID.4 are more than 30% higher. In our view, this situation is unsustainable, and we expect Volkswagen to significantly lower prices to avoid losing market share.
However, it is almost impossible for these European domestic car manufacturers to achieve profitability at such pricing.
Comparing the BYD Sea Lion (assembled in Eastern Europe) and the Volkswagen ID.4 (manufactured in Germany), if prices remain the same, Volkswagen’s pre-tax profit per vehicle would be a loss of about $10,000. Even if Volkswagen sells at a price 10% higher than the Sea Lion, the loss per vehicle would still be around $7,000.
