BYD’s Profit Decline and the Risks of Sustained Price Wars in the EV Sector: Assessing the Long-Term Sustainability of Aggressive Growth Strategies

The electric vehicle (EV) sector, once hailed as a beacon of innovation and profitability, is now grappling with the fallout of aggressive price wars and margin compression. BYD, the Chinese automaker that has dominated global EV sales in recent years, exemplifies the sector’s paradox: record revenue growth coexists with eroding profitability. In Q2 2025, BYD’s net profit plummeted 29.9% year-on-year to 6.4 billion yuan, despite a 14% rise in revenue to 200.9 billion yuan [1]. This decline marks the first quarterly profit drop in over three years and underscores the fragility of growth strategies reliant on price cuts and market-share expansion.

The Price War: A Double-Edged Sword

The EV industry’s price war, ignited by BYD’s aggressive discounts of up to 34% on 22 models in 2025, has driven sales but at the cost of gross margins. BYD’s Q2 2025 gross margin contracted to 16.3%, a 3.8 percentage point drop from the previous quarter [4], while the industry-wide margin for Chinese EVs fell to 10–15%, far below Tesla’s 18% [2]. Competitors like Leapmotor and SAIC’s IM Motors have followed suit, exacerbating margin pressures [2]. This dynamic reflects a broader shift in investor focus from profitability to unit sales, with valuations increasingly tied to volume rather than margins [2].

The price war is not confined to China. Global EV sales are projected to grow by 19.8% in 2025 to 21.29 million units [4], but this growth is accompanied by overcapacity and weak demand. In China, the average car price fell 19% over two years, with hybrids dropping 27% [5]. Regulatory pressures, including China’s 60-day supplier payment rules and EU tariffs of 17–35.3% on Chinese EVs, have further squeezed margins [1]. BYD’s pivot to plug-in hybrid electric vehicles (PHEVs) to bypass tariffs and its global expansion into Hungary, Thailand, and Mexico aim to mitigate these risks [1], but execution challenges—such as a 154.4 billion RMB inventory overhang—remain [2].

Strategic Resilience or Precarious Gambit?

BYD’s response to margin pressures includes vertical integration, R&D investments in technologies like the Blade Battery and ADAS systems, and global diversification. These strategies have helped maintain a 36% NEV market share in China and drive revenue growth [5]. However, the company’s debt-to-asset ratio reached 71.1% in Q2 2025, and its working capital deficit expanded to 122.7 billion yuan [1], signaling financial strain. Meanwhile, weaker competitors like NIO and XPeng face shrinking margins and liquidity risks [6].

The Chinese government’s intervention—urging self-regulation and cautioning against selling below cost—has failed to curb the price war [4]. Industry analysts predict consolidation, with only 15 of the current 129 EV brands surviving by 2030 [2]. For BYD, the path forward hinges on balancing short-term margin preservation with long-term innovation. Its success in scaling premium models and navigating geopolitical barriers will determine whether its aggressive growth strategy is sustainable or a temporary fix.

Long-Term Outlook: Innovation vs. Overcapacity

While the EV sector faces near-term turbulence, long-term growth drivers remain intact. Policy tailwinds, such as the U.S. Inflation Reduction Act and the EU’s 2035 ICE ban, will accelerate the transition to electric mobility. Battery cost declines and charging infrastructure expansion are also improving affordability [3]. However, overcapacity in critical mineral supply chains and geopolitical tensions—such as U.S. tariffs on Chinese EVs—pose risks [2].

BYD’s ability to sustain profitability will depend on its capacity to differentiate through premium offerings and technological leadership. Its global expansion and PHEV strategy offer a buffer against regulatory headwinds, but execution risks persist. For investors, the key question is whether BYD can maintain its market leadership while navigating margin pressures—a challenge that will define the sector’s evolution in the coming decade.

Source:
[1] BYD's Profit Decline and the Risks of an Uncontrolled Chinese EV Price War: Assessing the Sustainability of a High-Stakes Growth Strategy [https://www.ainvest.com/news/byd-profit-decline-risks-uncontrolled-chinese-ev-price-war-assessing-sustainability-high-stakes-growth-strategy-2509/]
[2] BYD's Pricing Gambit: A Double-Edged Sword for China's EV Sector [https://www.ainvest.com/news/byd-pricing-gambit-double-edged-sword-china-ev-sector-investor-returns-2508/]
[3] Sector Highlight: Powering the Future with Electric Vehicles [https://www.poems.com.sg/stocks/articles/sector-highlight-powering-the-future-with-electric-vehicles/]
[4] Trends in electric car markets – Global EV Outlook 2025 [https://www.iea.org/reports/global-ev-outlook-2025/trends-in-electric-car-markets-2]
[5] BYD's Profit Growth and Strategic Diversification in a Competitive EV Landscape [https://www.ainvest.com/news/byd-profit-growth-strategic-diversification-competitive-ev-landscape-2508/]
[6] China's EV Market Faces Brutal Test After BYD's Aggressive Price Cuts [https://finance.yahoo.com/news/chinas-ev-market-faces-brutal-132300801.html]