There’s a price war underway in China’s electric vehicle (EV) market, and it’s taking place on multiple fronts. Since January, more than 30 automakers have slashed the prices of their vehicles, amid a steep drop in demand for new cars. Now, battery makers are joining in too, spurred on by aggressive moves by China’s CATL, the world’s largest battery maker. 

The falling price of EVs ought to be welcomed by consumers, which in turn could be positive news for the energy transition: China’s EV market is already the world’s largest by a significant margin, accounting for more than half of electric vehicle sales last year. But the aggressive price cutting and deal making is drawing the attention of China’s regulators — and even apprehensive words from Xi Jinping. 

This week, The Wire looks at China’s electric vehicle price war: how it started, the potential winners and losers, and implications for the long-term competitiveness of the nascent sector.

HOW IT STARTED

The price war among China’s automakers started after Tesla fired the first shot. In early January, the company slashed its prices in China by as much as 13.5 percent, after seeing a slowdown in sales in its largest international market. 

But the fall in Chinese EV sales isn’t exclusively a Tesla problem. China’s central government ended its long-running subsidies for electric vehicles in 2022, a popular initiative that poured hundreds of billions of yuan into the EV sector. The impending end of those subsidies last year likely encouraged households to move up their purchases, helping to drive a major uptick in EV adoption. About 5.7 million plug-in EVs were registered in China in 2022, an 83 percent increase year-on-year, according to the China Passenger Car Association, an industry group. 

The end of those subsidies, combined with shaky consumer confidence since the end of last year as China emerged from zero-Covid, meant that automakers have taken a hit to their sales this year. Tesla’s move in January sent a ripple through the sector. The American firm saw a big boost in sales, at the cost of local competitors Nio, Xpeng and Li Auto, which reported steep declines.

Now, some of those companies, alongside the big state automakers SAIC and GAC, are clamoring to cut prices and offer incentives to prospective buyers. Foreign automakers including BMW, Mercedes and Volkswagen have also joined in. Even market leader BYD, China’s top EV maker by a wide margin, was forced to cut prices for some of its cars this month.

With little end in sight, the aggressive price cutting is likely to have a culling effect on China’s nascent EV industry, says Michael Dunne, founder of ZoZoGo, an automotive consultancy. “Nio, Xpeng and Li Auto are run by smart guys and enjoy the backing of provincial godfathers, “ he says. “But there are over a dozen other automakers trying to get on track. I expect we’ll see the failure of some of the smaller ones.”

BATTERIES

Further up the supply chain, competition is also heating up among China’s automotive battery suppliers. The brewing price war here comes as the price of lithium is passing an inflection point, after skyrocketing over the last two years. Price reporting agency Benchmark Mineral Intelligence’s lithium index is down 13 percent from its peak in December, and many analysts expect prices to fall further. 

“Automakers are increasingly pursuing a multi-pronged procurement strategy. They don’t just want to get their batteries from CATL, they want to expand their base,” says Kevin Shang, senior analyst at Wood Mackenzie, an energy research consultancy. “CATL is feeling the pressure from not just tier one battery manufacturers like CALB, but tier two manufacturers as well.”

Fujian-based CATL, which accounts for 37 percent of global battery production, has been negotiating in recent weeks to cement its market dominating position. The company has approached several Chinese automakers including Nio, Li Auto, Huawei and Zeekr (part of Geely) with steep discounts on its batteries. But there’s a catch: CATL is requiring that discount takers agree to source as much as 80 percent of their battery purchases from it for the next three years, according to several Chinese media outlets.

Such a brazenly anti-competitive move — echoing some of the tactics that landed China’s tech sector in hot water — has raised eyebrows. “It looks like CATL is getting a little too big for its britches,” says Dunne. “Using its clout as market leader to cut sweetheart deals with select customers — that’s not becoming of a national champion.”

CATL did not respond to requests for comment.

In a meeting with industry and commerce leaders on the sidelines of China’s ‘Two Sessions’ political gathering this month, Xi Jinping said he was “both happy and worried” about CATL’s leading global position, according to official news agency Xinhua. He warned that emerging industries “should avoid marching ahead alone as if invincible, only to ultimately be caught up and wiped out.” 

Meanwhile, CATL’s recent deal to assemble batteries in a new factory in the U.S. for Ford has also drawn criticism from both hawkish lawmakers in Washington and economic regulators in Beijing, who are concerned that Ford may gain access to sensitive battery technology.

In a sign of Beijing’s unease with CATL’s largesse, the company’s plan for a $5 billion listing on the Swiss stock exchange has been delayed by regulators, according to Reuters. CATL planned to use the proceeds to fund its expansion into Europe and the United States, but the China Securities Regulatory Commission (CSRC) has yet to give it the green light.

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