 Hi there, Andrew here. In this video, I will talk about why electric car producers from China pose a big threat to Tesla stock long-term. As you will learn by the end of this video, Chinese EV cars are not some cheap junk. They are the real deal and Elon Musk is paying attention now, unlike 10 years ago. And one company stands out among them all, which is BYD. In 2024 BYD overtook Tesla as the largest manufacturer of electric vehicles in the world by volume. So why is this important for Tesla? Can US manufacturers of cars survive the onslaught of inexpensive Chinese electric vehicles? These are the questions I will tackle in this video. But first, let's back up and understand who BYD is. BYD was established in Shenzhen in 1995 by Wang Chuang Fu, who was a chemist by profession. At his beginning, BYD focused on manufacturing lithium-ion batteries for smartphones. Among BYD's customers were Motorola, Nokia and even Apple. After listening on Hong Kong Stock Exchange in 2002, BYD's fate took a twist. They decided to pivot to cars in 2003. But at that time, Chinese government stopped issuing new licenses to car makers. So BYD had to purchase another small car manufacturer with a license. First, BYD went on with the legacy of the previous owner and produced internal combustion engine cars. But in 2008 they produced their first electric hybrid car called F3DM. Warren Buffett took a notice of that and in 2008 Berkshire Hathaway invested $230 million into BYD. And the first pure electric vehicle called BYDE6 came out in 2009. Asked about BYD during Bloomberg interview in 2011, Elon Musk laughed the company off. He said, have you seen their car? I don't think it's particularly attractive. The technology is not very strong and BYD as a company has pretty severe problems in their home turf in China. I think their focus is and rightly should be on making sure they don't die in China. Now fast forward to 2024 and BYD zipped past through Tesla. The company became the largest manufacturer of EV and hybrid vehicles in the world by units sold. In Tesla's recent earnings call, here's what Elon Musk had to say about this. If there are no trade barriers established, they will pretty much demolish most other car companies in the world. They are extremely good. There are several reasons behind such star success. Like Tesla, BYD is a conglomerate that specializes in producing many things. These include EV batteries and electronic components for cars. Also like Tesla, BYD produces its own solar cell solutions and supercharging equipment for EV cars. Another factor behind BYD success is state subsidies. Of course, this is my personal opinion and I cannot verify this for sure. So keep this in mind. But here are the numbers. According to Reuters, China's subsidies for electric and hybrid vehicles amounted to 57 billion from 2016 to 2022. This greatly helped China become the world's largest producer of EVs. The China's federal authorities terminated this 11-year program in 2022. But state and local authorities likely still offer subsidies to attract investments. For instance, BYD received 1.78 billion of yuan in state subsidies in the first half of 2023, according to Nikkei. This roughly translates into $260 million. Can you imagine the numbers before 2023? Tesla also received subsidies for its EV manufacturing from federal or state governments in hundreds of millions of dollars, too. For instance, Reuters estimated that the Nevada Gigafactory got $750 million in tax breaks. So it's not like one country is good and another country is bad. Both countries pursue industrial policies with general subsidies. So this is nothing new. But what's different about China is this. China initiated a national industrial policy for EVs early on. And they were very systematic and methodical about it with specific end goals in mind. Conversely, the US didn't really have any industrial policies for EVs per se. It was more of a patchwork of tax reliefs here and there. As of now, China controls many aspects of battery production, especially materials inputs. True, most of the lithium is extracted in Australia or Chile. But China controls over 60% of processing raw lithium into battery-grade chemicals. And China built massive industrial complex and supply chain around EV manufacturing with huge economies of scale. As commentators suggest, this allowed EV manufacturers to have distinct cost advantages to do this. And these cost advantages can be as much as 20% over rivals such as Tesla. And that's big. Let's come back to BYD again. The real breakthrough for the company came in 2020, though. BYD unveiled a so-called blade battery based on lithium-iron phosphate. The company made a significant progress with this type of battery due to its decent energy density and high levels of safety. In 2023 BYD manufactured almost 3 million cars of which 1.57 million were pure battery EVs. In comparison, Tesla manufactured 1.84 million pure battery EVs. So in principle, Tesla still maintains the lead, but BYD is narrowing the distance very fast. To be fair, most of BYD's units sold are cheaper models popular in China. Also, over 70% of its electric and hybrid vehicle sales are in China. But this is gradually changing as BYD expands abroad. Here's a quick comparison of financial performance for BYD and Tesla. We see that BYD is narrowing Tesla's lead in performance terms. BYD still lacks Tesla in terms of total sales numbers and profitability, but it is getting there. The thing that will appeal most in many markets is BYD's low-priced vehicles. Both BYD and Tesla compete head-on with mid- and upper-class vehicles. They price them more or less the same based on performance specs in many markets. We can, of course, argue about the quality comparison, because some people say that BYD is neck-and-neck with Tesla, while others can say that, oh no, it's way far off. So keep this in mind, but BYD has one thing that Tesla doesn't. And that is low-priced models that Tesla doesn't currently manufacture. And this comes extremely handy, especially in emerging markets. For example, take BYD's Siegel model. Siegel is a hatchback model with four seats and five-door configuration. The price is astonishing $11,000. True, this model has a much lower driving range of up to 250 miles and is a bit tight on space. But its low price point is the most appealing factor in many developing markets. The car is arguably perfect for urban environment. Tesla's lowest-priced vehicle is Model 3 with a price tag of around $40,000 before fees, taxes and zero upgrades. Tesla has plans for a cheaper compact crossover model with a price between $25,000 to $30,000. That's a move in the right direction. But still, will this be enough to compete with BYD in emerging markets? While Tesla is probably ignoring this low-priced EV segment on purpose, at some point such strategy may backfire. True, the profit margins are probably better in mid- or upper-class vehicles. But there are just so many of them that you can sell to wealthy customers. As for the low-priced EVs, they can reach wider masses and in many other markets. And moreover, BYD can build a brand identity with these vehicles if they prove reliable. And later, they can upsell their higher-priced models in the same markets. Moreover, BYD is ramping up sales overseas. They have factories in Brazil, India, Japan and Hungary. The popularity of BYD's vehicles is growing in Europe too. They will likely focus more on developing countries going forward, especially Latin America and India. But they also announced plans to build a factory in Indonesia, so a focus on Southeast Asia is another direction that BYD is taking. Because of rapid expansion abroad, countries are taking notice of BYD. Some even complain of underpricing. For instance, the European Commission launched an investigation in 2023 against Chinese EV imports. They claim that these imports benefited from generous state subsidies. If proven EV imports from China may face higher tariffs, they already taxed at 10%, so expect more. One market that BYD is still to crack is Tesla's home turf, the US. As it stands now, the US consumers cannot buy inexpensive EVs made by BYD. Donald Trump imposed a 25% tax tariff on Chinese auto imports. Joe Biden affirmed this policy and denied buy America tax credits to these cars. So such steps made it very hard for BYD to sell its cars in America. But the funny thing is that with cost advantages and state subsidies, BYD may be able to absorb these punitive tariffs at some point and offer its vehicles in America. At least hypothetically speaking, the US may have to up its tariffs again to counter this. But this is not easy. China may impose its own higher tariffs on US auto imports. All this presents many tradeoffs. Keep the tariffs and US consumers are paying higher prices for EVs. Conversely, remove tariffs and a flat of cheap EVs from China will hurt domestic production. The consequences are lost manufacturing capacity, layoffs or fewer alternatives. As for fewer alternatives, we know where monopolies lead to possible embargoes or even higher prices. You do not need to look far for China's industrial monopoly. Take for example rare earth minerals that are used in many advanced electronics applications. China controls over 70% of rare earth elements production. And there were many instances when China weaponized this industrial monopoly against other countries. Again, I'm not saying that someone is good or someone is bad. The US uses dollar as a financial weapon against its enemies, rightly justified or not. All I'm saying is that such reliance on China poses many security questions. So it becomes understandable why America and Europe protect their car manufacturers. Finally, BYD and other Chinese car makers can start assembling EVs in the US or around its border to avoid tariffs. It's very likely that the manufacturing cost in the US for EVs will be higher due to raw materials imports or more expensive labor. The whole reason behind low prices for BYD's cars is cheap labor at home and its own designed and manufactured batteries. The funny thing is that even Tesla uses BYD's batteries in its own cars. For example, Model Y is the case in point, which is somewhat ironic. The bottom line is this. Both BYD and Tesla can coexist, but BYD is making it hard for Tesla's expansion plans abroad and especially in emerging markets. There BYD can outmaneuver Tesla with its more affordable options. So I think Elon Musk focused on producing cheaper EV models as they move in the right direction. Once BYD establishes in developing regions with its own factors, it'll be much harder for Tesla and others to compete with it. BYD cut its teeth in China and they're rapidly expanding in India, Brazil, Indonesia and other developing markets. Many commentators compare Tesla to Apple of EVs, while BYD is more like a mass-market Android producer. But I wouldn't discount them, they have their own luxury vehicle lineup that competes with Tesla directly. By the way, this video is no way a comprehensive take on EVs market. We may say that the EV market is experiencing a so-called winter or slowdown, especially in the US. And this will be a topic for my next video. So stay tuned for that and subscribe to my channel. Thanks for watching.