This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
What happened
Shares of many Chinese companies are getting hit hard today, including several of China's electric vehicle (EV) makers. Shares of Nio (NYSE: NIO), XPeng (NYSE: XPEV), and Li Auto (NASDAQ: LI) all plunged by double digits Monday morning. As of 10:53 a.m. ET, Nio shares were down 20.6%, XPeng was lower by 18.8%, and Li Auto had plunged 24.1%.
So what
These names are reacting to news that Chinese President Xi Jinping locked in a third term and selected a group of loyalists for top leadership spots at the Communist Party Congress. Investors fret that could have negative implications for private Chinese companies as well as the country's economy in general.
It implies the continuation of Xi's zero-COVID policy that has led to lockdowns. These lockdowns have crimped both supply and demand in some areas. Xi has also sought to regulate the tech industry and attempt to restrict wealth inequality by clamping down on some successful businesses and their founders. But investors also are reacting to other news that is unique to the EV industry.
Now what
EV bellwether Tesla announced Monday that it is cutting prices on some vehicles in China. That comes after Tesla upgraded its plant in Shanghai that now has the capacity to produce more than 1 million vehicles per year. Some investors think the price cuts could signal a demand problem, which would be highly impactful to domestic EV makers. But there are other possible reasons for the new pricing as well.
Tesla dropped the prices of its Model Y by about 9% and the Model 3 by about 5% for Chinese buyers, reports The Wall Street Journal. If the reason is slowing demand, it comes at a particularly bad time for companies like Nio, XPeng, and Li, which have been adding new models and are working to earn profits for the first time. The third quarter was a good one for sales from these companies after navigating disruptions from COVID-related lockdowns.
Nio delivered 29% more vehicles in the third quarter compared to last year. XPeng and Li Auto increased deliveries by 15% and 5% year over year, respectively. Nio's record quarterly deliveries included the first shipments of its ET5 midsize sedan. XPeng started delivering its new G9 SUV in September, and Li Auto also shipped 10,123 of its new Li L9 SUVs last month.
While it remains to be seen how China's economy will perform under President Xi's third term, the price move from Tesla might not be a sign of slowing demand right now. Rising raw material costs led to prior price increases from Tesla and Chinese EV makers alike. Some commodity costs have since come down, including costs for steel and battery materials.
Investors should rightly be focused on the long-term impacts from China's leadership, but today's stock price drops might be overdone if investors are interpreting Tesla's move as a demand problem in China.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
