Musk Should Be Worried: It's No Surprise BYD Just Overtook Tesla
Musk's AI obsession just lost him the EV race.
It’s official. Tesla is no longer the top dog of the EV world. At least in sheer numbers. In 2023, the Chinese EV giant BYD delivered a massive 1.6 million battery-powered electric vehicles. While this is still behind Tesla’s vast 1.84 million delivered EVs in 2023, that isn’t the entire story. You see, in the final quarter of 2023, BYD actually outsold Tesla for the first time. In Q3, Tesla delivered an impressive 484,000 EVs, but BYD delivered a whopping 526,000! As such, BYD is set to outsell Tesla in 2024. But how has a brand mostly constrained to China managed to outsell one of the most dominant brands of the 21st century? Well, it’s all to do with their vastly different approach to growth.
On the surface, BYD and Tesla seem to be very similar companies, only differing in their country of origin. They both lead the global EV race, have proprietary battery technology ahead of everyone else, have industry-leading efficiency and charge speeds, have built their own charger networks, and both build ludicrously fast yet affordable EVs. But dig a little deeper, and you will find they both have polar opposite approaches to growth.
You see, BYD wants to grow as an electric vehicle company, on the other hand, Tesla intends to grow as an AI company. This has dramatically affected how the two companies have spent their R&D money and is why BYD threatens to outshine Tesla.
Tesla has touted its self-driving AI supremacy for years now. But recently, it has doubled down on the technology to try and bring genuinely autonomous vehicles to market (even though Mercedes and Audi have already beaten them).
Creating such a capable AI is a costly undertaking. In fact, Tesla spends more on R&D than any other automaker, at $3.685 billion per year (as of September 2023). The vast majority of this expenditure was directed towards its AI program, with $2 billion earmarked for AI training in 2023 and another $2 billion in 2024. On top of that, Tesla is spending another $1 billion to build its Dojo supercomputer by 2024, which will be able to train its AI far more effectively than their current system. By 2024, Tesla is set to have spent well over $5 billion developing its self-driving AI.
For some sense of scale here, VW developed their MEB platform for $7 billion back in 2016 (when EV development cost more). The platform gave rise to a wide range of EVs at different price points and in various segments in the industry, such as the VW ID Buzz, VW ID Buzz cargo, VW ID.3, VW ID.4, VW ID.5, VW ID.6, VW ID.7, Audi Q4 Eton, Audi Q5 Eton, Ford Explorer EV, Škoda Enyaq, Škoda Enyaq Coupe, Cupra Born and the Cupra Tavascan. So, if Tesla hadn’t focused on AI, it could have a far more extensive and better line-up of cars by now.
There is actually evidence of this. Tesla seemingly sacrificed developing a $25,000 model to achieve its AI goals. This “Model 2” was meant to hit the market this year, but we have yet to even see a prototype of the car at one of Tesla’s swanky launch shows, and Musk has been increasingly quiet on the topic.
But why this drastic push for self-driving? Well, Tesla’s profit margins have slumped down to 17.9% in Q3 2023, nearly half of what they once were. As such, Tesla needs to find new revenue streams to keep its profits buoyant and its stock price high. So, they are taking a leaf out of Apple’s book and looking to reduce the profit from the sale of their hardware and increase the profit they make from software and service subscriptions. Musk has even said that in the future, Tesla could sell cars at zero profit and instead make their profit solely from self-driving subscriptions.
Musk and many Tesla investors are incredibly bullish on this matter. Ark Invest, which is heavily invested in Tesla, thinks robotaxis could add $613 billion to their revenue by 2027. Some investors are predicting that thanks to autonomy, Tesla could be worth well over a trillion by 2030! This potentially massive growth in revenue just over the horizon is why Tesla stocks are currently worth 9 times more than those of an equivalent automaker. People are speculating that Musk’s AI gamble will pay off, and the stock price will go up in the future.
As I have covered before, Musk is leaning into this speculation, making huge promises about their self-driving capabilities (despite the fact he kneecapped them in 2021; read more here) to drive Tesla’s stock price up. He then uses his inflated Tesla shares as collateral for billion-dollar loans and is cashing out while the stock price is pumped. Musk sold a whopping $23 billion in Tesla stock in 2022 alone (though he hasn’t sold any in 2023 as the stock price has slipped).
The question has to be asked: if Tesla could be worth several hundred billion more than it is today in just a few years, why is Musk selling? Well, the sceptic in me points to numerous industry experts who say self-driving cars won’t be a reality until around 2035 and won’t be widely available until the mid-2040s. Bearing in mind that this opinion is based on vehicles with far more capable sensors and systems than Tesla currently uses (read here to find out about their backward “vision only” approach). As such, Tesla isn’t likely to be the first to offer such a vehicle or have a considerable advantage in this industry. So what Musk and Tesla’s major investors are predicting seems incredibly far-fetched. Are they just playing the stock market through inaccurate hype and false promises to line their own pockets? Maybe, I will leave that for you to decide.
BYD is literally the polar opposite of Tesla here. They have repeatedly stated that they believe fully autonomous driving is “basically impossible” and that the technology would be better suited to further automating manufacturing, as it is a more constrained, less risky application than a self-driving car. BYD executives have even said that the many industries and businesses investing vast amounts of money into autonomous AI technology will be disappointed as “after investing for many years, it will prove it leads nowhere.” A comment that definitely wasn’t directed at Musk…
Like Tesla, BYD spends a considerable amount on R&D, at roughly $2.77 billion annually. But unlike Tesla, this money is spent on creating battery technology, increasing their EVs’ efficiency, improving manufacturing, and developing new models and platforms. So, while their R&D expenditure might be lower than Tesla’s because they aren’t playing around with AI, they actually spend over a billion dollars more per year on EV development!
As such, it’s no wonder that they have dramatically increased production over the past few years to match and now beat Tesla’s industry-leading production. Amazingly, during this push, their profit margins grew to 22.1%, notably higher than Tesla’s.
How have they done this? Well, they developed a fantastic battery called the Blade Battery that is dramatically cheaper and easier to produce than Tesla’s 4680 whilst having the same, if not better, performance (read more here). The battery is so good that Tesla is buying it for its European-made Model Ys over their own 4680 cells. BYD has also adopted Tesla’s gigacasting production method (which wasn’t actually Tesla’s idea; they just were one of the first to use it) and ran with it, making their production lines far more efficient and cheaper to set up and run. In fact, BYD is filing patents around EV technology and production 16 times faster than Tesla, and this IP is driving the cost of their EVs down while increasing their performance.
I mean, who would have thought it, spending more money on developing EVs leads to better EVs that sell more…
This is painfully obvious when you compare Tesla’s Model 3 with BYD’s Seal. These two cars are almost identical in size and cargo capacity. In the UK, the mid-range Seal costs £45,695, has an 84 kWh 800-volt battery pack, a WLTP range of 354 miles, and a 10% to 80% charge time of 37 minutes. The Tesla Model 3 Long-Range costs £4,295 more, has a smaller 78.1 kWh 400-volt battery, a slightly smaller WLTP range of 348 miles and a slightly faster 10% to 80% time of just under 30 minutes. This price difference seems acceptable, as the Tesla has more power and quicker acceleration. However, The Seal is a far newer model than the 3, and therefore, its price will fall over the coming years as production set-up costs are paid off. BYD also predicts that their Blade Battery could cost as little as $55.40 per kWh in a few years, which is less than half the cost of the cells in the Tesla. So give it some time, and the Seal seems set to undercut the Model 3 dramatically.
So, should Musk be worried?
Yes, he should. BYD has achieved all of this whilst only really being in the Chinese market. They are now actively expanding into Europe, the UK, Australia and Canada with manufacturing facilities and dealerships in these locations. Moreover, they are doing really well in these new markets, with glowing reviews of the models already on sale there. This expansion, combined with their tumbling production costs and increasing performance (thanks to actually spending R&D money on EV development) makes them a considerable threat to Tesla’s domination of the EV world. What’s more, as people become disillusioned with Musk’s endless promises that fully autonomous Teslas are just a few years away, there is a risk that BYD’s success could expose Tesla’s AI push as folly and tank its stock value. So, Musk should be worried; as if he can’t get his AI to work as promised soon, Tesla will be utterly dethroned.
Thanks for reading! Content like this doesn’t happen without your support. So, if you want to see more like this, don’t forget to Subscribe and follow me on BlueSky or X and help get the word out by hitting the share button below.
Sources: FT, The Guardian, Bloomberg, The Register, Electrek, Statista, FT, IOT, WSJ, Inside EVs, Y Charts, Statista, Verdict, NY Post, IBD, EV Database, Green car guide, EV Database, Inside EVs, Verdict