Will China take a big bite out of Elon Musk’s Tesla?

adze (NASDAQ:TSLA) stock has been a turbulent ride for investors this year, with shares down nearly 12% year to date. While much is expected of the AI-powered electric vehicle (EV) pioneer, with the Robotaxi event now just over a month away, questions remain as to whether Tesla can continue to be the leader in electric vehicles until the end the next decade, when Chinese rivals really start to step on the gas.

If Chinese EV competitors continue to make price moves, there is a serious risk that Tesla sales could drag on for many years down the road. After all, Tesla vehicles don’t come cheap. And after battling the cost of living crisis driven by inflation, I’m not sure consumers are ready to splurge on a new luxury Tesla Cybertruck, not until prices drop even more.

Key points about this article

• Chinese EV manufacturers pose a competitive threat with their incredibly low prices.
• Tesla’s high-profile brand and technological edge might be enough to fend them off.
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Tesla’s price cuts are one way it can fight back against rivals

If Tesla gets more aggressive with its global price cuts to spark demand and be more competitive with rivals, the margin hit could have the potential to be disappointing for investors and analysts. Not to mention that such cuts could hurt Tesla’s luxury brand status. In any case, I don’t think the continued price cuts are enough to erode the great brand affinity built up over the years.

At the end of the day, Tesla is one of the industry pioneers. The man behind the brand, Elon Musk, is often the main selling point for potential customers looking to switch gears by going all-electric. The big question is whether advances in newer and more affordable Chinese electric vehicles could take a bigger bite out of Tesla’s market share.

As it stands, some of the top Chinese EV brands — I think BYD Co. (OTCMKTS:BYDDF), a firm that Warren Buffett’s right-hand man Charlie Munger owned and praised — are not as well-known in the U.S. market and other parts of the globe. BYD can be a smooth operator with exceptionally talented managers and various competitive advantages. Still, they need to spend aggressively on marketing campaigns, as most other car companies do, if they’re going for a brand as strong as Tesla.

Of course, BYD can only build brand affinity by making great, reliable and long-lasting cars at competitive prices. But such a reputation takes years, even decades, to build. And Chinese cars don’t seem willing to wait to take a bigger share of that booming EV market.

The strength of the Tesla brand is second to none

When it comes to buying a new car, trust in a brand is vital. And when it comes to luxury, Chinese EV brands still don’t quite get their act together, even if some of the newer Chinese EV models offer interesting innovations at a more reasonable price. In a way, the Tesla brand is the main source of its economic moat as the EV scene gets a little more crowded.

Even if the next Robotaxi day is missing, I’d argue that Tesla doesn’t need to go full speed ahead on innovation to fend off its fast-moving Chinese rivals. While high-tech features (think artificial intelligence and self-driving) and lower prices are key factors in gaining market share, I still think brand power matters, perhaps more than ever, as EV manufacturers from China and the US understand it.

In any case, I think competitive threats, whether from China or elsewhere, are included in the stock here. Tesla shares have already lost more than 46% of their value from their 2021 peak. And with potentially low expectations ahead of the robotaxi event (a Waymo-killer seems highly unlikely), the bar may be low enough to set the stage for a magnificent recovery over many years.

As we approach Halloween 2024, Tesla will have a chance to update us all on its self-driving progress. I think a base case scenario would see Musk’s company keep up step by step Alphabet (NASDAQ:GOOG) Waymo. However, there is always a chance that Tesla will show signs of surpassing Waymo and others with full self-driving technology. If that happens, perhaps Tesla’s stock could command a bigger premium than its rivals, many of which could be lagging behind Tesla by a wide range.

Conclusion of TSLA actions

A strong brand, cutting-edge self-driving technology, battery innovations and self-driving robots can help Tesla stay miles ahead of its Chinese electric vehicle peers, even as the price of the electric vehicle continues to rise.

Sure, Chinese EV rivals may be able to take some mid-term share as they woo cost-conscious customers. However, once the bull is back in the driver’s seat, look for Tesla stock to leave the charging station with its foot on the pedal.

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