Tesla continues its campaign of discounts in China, prompting speculation about pricing battles and the state of the electric vehicle (EV) market in the world's largest automotive market.

Over the weekend, Tesla introduced an enticing new incentive of 8,000 Yuan (approximately $1,100) for select Model 3 sedans in China. Additionally, prices for the long-range and performance variants of the Model Y crossover vehicle have been slashed by 14,000 Yuan (around $2,000).

The long-range Model Y is now available in China starting at approximately 300,000 Yuan or $41,400. At the beginning of the year, the same model started at about 358,000 Yuan or $49,400. Similarly, the performance version of the Model Y now has a starting price of around 350,000 Yuan or $48,300, compared to 398,000 Yuan or $55,000 at the start of the year.

These price reductions from Tesla come shortly after Geely's EV brand, Zeekr, implemented price cuts for its Zeekr 001 crossover-sized vehicle. The cost of three versions of the Zeekr 001 decreased by an average of $5,000, resulting in base prices ranging from approximately $40,000 to $52,000.

It remains uncertain whether Tesla's decision to lower prices is a response to Zeekr's actions or market conditions. Despite efforts to obtain comment from Tesla, they have not responded at this time.

Thus far in 2023, Chinese demand for EVs has remained robust, partially due to price adjustments. According to Citi analyst Jeff Chung, sales of battery-electric vehicles (BEVs) have reached approximately 3 million units through July, representing a 23% increase compared to the previous year. Furthermore, new energy vehicles, encompassing both BEVs and plug-in hybrids, accounted for nearly 36% of total new car sales in July—a rise of two percentage points from June.

Zeekr's Growing Electric Vehicle Sales

Zeekr, a prominent player in the electric vehicle (EV) market, has experienced significant growth in its sales. In July alone, Zeekr sold approximately 55,000 EVs, which accounts for about 2% of the entire market. This represents a remarkable increase of around 127% compared to the previous year.

Although the company's market share is relatively small, demand for Zeekr's EVs remains strong. However, one aspect to keep an eye on is the increasing trend of price cuts by various auto manufacturers, including Tesla. This could potentially impact the demand for EVs and raise concerns among investors in the upcoming months.

Furthermore, continued price reductions may pose challenges in terms of profitability. While factors such as production costs and sales composition play a role, price cuts typically exert pressure on profit margins. Tesla, for instance, experienced a decline in its operating profit margin in the second quarter of 2023, dropping from nearly 15% to just under 10% compared to the previous year.

Despite this, there have been positive outcomes from these price reductions. Tesla reported a record-breaking delivery of 466,140 EVs in the second quarter alone, and it is projected to deliver approximately 1.8 million EVs by the end of 2023, surpassing the 1.3 million delivered in 2022.

This remarkable growth in deliveries has greatly influenced Tesla's stock performance this year. Currently, Tesla's stock has risen by approximately 97%, far exceeding the gains of both the S&P 500 (16%) and Nasdaq Composite (30%).

However, investors should be prepared for potential volatility at the beginning of the week as the market adjusts to these new price cuts.

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