HONG KONG: The fallout is becoming impossible to ignore in the fierce battle among Chinese carmakers.
With BYD Co reporting a staggering 30% plunge in quarterly profit, its first decline in over three years, it’s become clear that not even dominant players are safe in the cutthroat battle for market share.
Despite robust overseas sales, BYD’s net income of 6.36 billion yuan (US$892mil) for the three months though June 30 fell short of analysts’ estimates for a modest increase.
Heavy discounting saw BYD’s gross margin contract to 18% from 18.8% in the first half of 2024, although that figure is still among the top in the industry, exceeding rivals such as Zhejiang Geely Holding Group Co and Chery Automobile Co.
The Shenzhen-based giant blamed “industry malpractices” and “excessive marketing” for pressuring its bottom line –an ironic twist considering BYD has been a major driver of the price war, leading multiple rounds of cuts since 2023, including its latest in May.
Its most recent discounting campaign prompted the government to warn automakers off “rat-race competition,” saying that price wars can affect supply-chain security and seriously damage the international reputation of “Made-in-China”.
BYD’s stumble comes as a shock given global expansion has gained pace this year, with the brand making major inroads in markets like Brazil, which accounts for about one-third of its international sales, Australia, Singapore and parts of Europe.
Overseas revenue, excluding Hong Kong, Macau and Taiwan, was up 50% in the first six months versus the same period a year ago to 135.4 billion yuan.
Calling the margin shrinkage “scars of competition,” a note published by research firm Stanford C Bernstein over the weekend observed that margin pressure persisted despite the higher overseas sales mix.
“Increased promotional efforts didn’t achieve anticipated volume growth,” analysts including Eunice Lee wrote, adding higher capital expenditure further weighed on margins.
Bernstein maintained its “outperform” rating but lowered its target price from HK$133 (US$17) to HK$130. Shares in BYD closed in Hong Kong last Friday at HK$114.40, ahead of the earnings release.
Outside of gross margins weakening, the company’s net profit attributable to shareholders increased at a slower rate, another sign profitability is under pressure, while borrowings jumped to 39.1 billion yuan from 28.6 billion yuan as of the end of last year.
Research and development expenses are also rising quickly, up more than 50% year-on-year, showing the company is leaning heavily into innovation even though margins are tightening. BYD is likely deliberately ramping up spending on core technologies – batteries, electrification and intelligence – as part of its long-term strategy to secure its lead in new-energy vehicles.
Arguably, there are fatter margins to be had from premium models like the Yangwang or Fangchengbao. Its latest financial statements indicate BYD is paying suppliers more quickly than before.
“The turnover days of the trade payables and bills payables of the group were at a low level in the automotive industry and further declined during the reporting period as compared to the same period in 2024,” the Aug 29 filing said, without revealing the exact number of days.
Back in 2023, BYD was taking an average of 275 days to pay suppliers, a period far exceeding global industry norms, data compiled by Bloomberg showed.
The company said in June it would comply with new government rules to pay suppliers within 60 days, a big adjustment that would likely hit its working capital outflows, reducing any flexibility in a downturn.
Nevertheless, the automaking powerhouse isn’t yet under any serious financial strain and a slower pace of growth may well be more sustainable. — Bloomberg
