If you think of electric cars, the first company name you are likely to bring to mind is Tesla (TSLA -1.11%). But Tesla most certainly isn't the only electric vehicle (EV) company or the only company making cars powered by alternative energy sources (including hybrids that use both carbon fuels and electricity). And there is a growing competitive threat that investors might not know about because it operates mostly in China.
Tesla is growing fast
To be fair, there is good news coming out of Tesla. For example, in the third quarter of 2023, it increased production by a huge 35% year over year. Deliveries were up an even larger 38%. That's an impressive increase, but more importantly, it shows that there's still strong demand for the company's various all-electric vehicles. It is the leader in the U.S. market, with a market share of more than 40% in the still fairly small EV niche.
Image source: Tesla.
It is likely inevitable that Tesla will cede ground to competitors over time. However, the growth of the EV market will probably allow the company to continue to grow even as competitors eat away at its industry dominance. There's no particular reason to dislike the company's business position, but it is important to recognize that it won't likely maintain that dominance.
China is a different game
Here's the interesting thing, and a fact that U.S. investors may not fully appreciate. China's BYD (BYDD.F 4.71%) (BYDDY 4.08%) produced and sold nearly 9% more electric vehicles in China than Tesla in the third quarter. If you add in hybrid vehicles, BYD's lead is even larger.
To be fair, the two companies don't make for an apples-to-apples comparison. Tesla tends to operate more at the high end of the auto space while BYD sells cars across price points, from cheap to expensive. Tesla's focus on more costly models helps it to support margins, while BYD's lower prices inherently hinder its margins but afford it a larger addressable customer space.
But the key takeaway is that in the world's second-largest economy, Tesla is not No. 1 in the EV market. China is one of Tesla's focus markets given the sheer size of the country's economy, and the competitive landscape there is something investors will want to consider when thinking about Tesla's growth prospects. If you are looking at Tesla, you really need to think about BYD, even though BYD doesn't sell currently cars in the U.S. because of tariffs.
But that last fact sets up what could be an even larger risk for Tesla. What happens if BYD starts to compete on Tesla's home turf? It is easy to dismiss that possibility because of current geopolitical tensions, but you shouldn't ignore the risk. For example, BYD has been a big investment for Warren Buffett and Berkshire Hathaway. Even after selling millions of dollars worth of shares, the Oracle of Omaha still owns a roughly 8% stake in BYD. That level of support from the famous investor could go a long way to help BYD find its way into the U.S. market, either via imports (assuming a tariff change) or perhaps even with U.S.-based manufacturing assets. That's pure speculation, but with so many companies starting to open new factories in the U.S., it isn't an unrealistic idea.
So the ultimate hidden risk for Tesla is that it has to face a well-positioned rival abroad and could, someday, have to deal with the same company in its stronghold, the U.S. market.
Consider the negatives
At this point, it seems Tesla has to continue slugging it out in China but is facing an only slowly growing attack from rivals in the United States. If things change for the worse in either market, Wall Street could quickly alter its view of Tesla, as well. Given the swift price advance in the stock over the past year, long-term investors might want to consider some outlier events (such as BYD entering the U.S. market) when they stress-test their Tesla investment thesis.
