What happened
Shares of Chinese electric vehicle (EV) makers were plunging Friday morning. Nio (NIO -5.35%), XPeng (XPEV -3.48%), and Li Auto (LI -2.69%) lost between 12.5% and 17% at the lows of the morning. As of noon ET, Nio was still lower by 7.1%, XPeng was down 14.1%, and Li dropped 8.3%. It wasn't news from these companies that caused the plunge, though. It was thanks to global EV leader Tesla.
So what
Tesla cut prices for its vehicles in China for the second time in less than three months. Investors feel that means a demand problem is ongoing -- or accelerating -- and are fleeing China-based EV stocks as a result.
It also means that Chinese buyers can spend less to buy Tesla's Model 3 sedan or Model Y SUV than for the China-based manufacturers offerings. Tesla now offers the Model 3 for the equivalent of about $33,000 in China, about 30% cheaper than it sells for in the U.S. The Model Y can now be had for less than $40,000 in China.
Image source: Nio.
Now what
Those prices are lower than what Nio, XPeng, and Li charge for their flagship vehicles. Nio launched its midsize ET5 sedan as its closest competitive offering to the Model 3. It began shipping in late 2022, but is priced at over $45,000. Li Auto's L7 SUV starts at the equivalent of almost $50,000, making it much less competitive with the Model Y after Tesla's price drop.
Since October, Tesla has quickly reversed vehicle price increases that it put in place last year. Nio and others followed those increases to help cover rising raw material and other costs. Tesla's latest move puts the Chinese companies in a bind, and investors know it.
Tesla has scale and profitability, where Nio, XPeng, and Li do not. So while Tesla might take a hit on its profit margins with the price reductions, it will still be a very profitable automaker. The Chinese EV makers are trying to achieve profitability, and won't be able to cut pricing to maintain market share -- at least not without resulting in increasing losses.
Investors may now see those increasing losses coming and want to be out of these names ahead of that. But these companies have also been quickly growing sales and adding models to offer. The market may not just simply switch to Tesla based on price. The most important factor will be whether the EV market itself continues to grow quickly.
These stocks will continue to fall if a Chinese recession hits consumer demand. But longer term, most industry watchers think the largest auto market in the world will continue to go electric, helping these EV makers as well.
