Al Root

The car business is brutally competitive. The self-driving car business is going to be, too.

Shares of Chinese electric vehicle leader BYD soared on Wednesday. Essentially free self-driving technology is the reason. The company's decision to put advanced driver-assistance technology on most of its vehicles, regardless of the cost to BYD, says a lot.

For starters, it says that car companies are going to need to have leading driver-assistance technology, or they won't be able to sell cars. It also says consumers might not be willing to pay a lot for the new features. It also shows that, like it or not, Tesla CEO Elon Musk was right about how to develop self-driving cars.

BYD's Hong Kong-listed stock rose 7.4% in Wednesday trading. The U.S.-listed American depositary receipts were up 7% in early trading, at $90.80, while the S&P 500 and Dow Jones Industrial Average fell 0.7% and 0.9%, respectively. The market dropped after monthly inflation data came in hotter than expected.

BYD's gains are tied to its decision to add the driver-assistance technology it calls "The God's Eye" to most of its EVs. The base system unveiled for the BYD brand includes cameras and ultrasonic sensors, supporting hands-free driving on highways, automatic emergency braking, and parking assistance, according to J.P. Morgan analyst Nick Lai.

"No price increase or negligible price hike for [the driver-assistance] feature" was a surprise, he wrote on Tuesday. BYD is giving it away. Lai rates BYD shares Buy and has a $122 price target.

BYD is also partnering with Chinese AI company DeepSeek to help teach the car to drive itself.

Years ago, Tesla moved to AI-based training and computing with cameras for its self-driving technology. This is the model that Nvidia CEO Jensen Huang emphasized in January at the Las Vegas Consumer Electronics Show. There has been a lot of debate about the approach over the years, with Tesla critics believing more sensors and traditional computing could be good enough.

Tesla can take a symbolic victory lap for that validation, but it doesn't mean it's actually going to win additional market share or profit for being right. The price is a problem.

Tesla charges U.S. drivers $99 a month or $8,000 for its highest-level driver-assistance product, which it calls Full Self-Driving $(FSD)$. BYD doesn't add an extra charge. Of course, nothing is free -- BYD has to pay for the hardware and software development. For now, it is content to win market share by subsidizing the technology.

BYD sold about 3.7 million cars in China last year, giving it about 15% of the total market and almost 50% of the market for electrified vehicles.

BYD appears to be trading costs for more volume. Its operating profit margins, at about 6%, aren't great. General Motors and Tesla generated 2024 operating profit margins of about 8% and 7%, respectively. BYD's profit margins trail that, but it is still more profitable than many Chinese peers.

Auto makers don't typically earn big profit margins. One of the reasons is that there are so many of them that it is tough to charge more or expand market share by adding technology. The new features help car companies run in place.

Investors expect more than only maintaining market share for Tesla. Coming into Wednesday trading, its shares were up almost 40% since its Oct. 10 robo-taxi event, where Musk laid out plans to launch a self-driving robo-taxi service in 2025. That gain amounts to about $300 billion in market value. Tesla's challenge will be to hold on to the value it creates with self-driving technology.

One way Tesla plans to do that is by launching an Uber-like service without drivers. Uber is valued at roughly $160 billion. That is more than General Motors, Ford Motor, and Stellantis combined.

Investors like less capital-intensive service businesses more than hardware businesses. Uber, of course, doesn't have to buy its cars. Car operation is an expense for Uber drivers. Tesla has the benefit of having millions of cars on the road capable of running FSD. Tesla owners would only have to opt in and make their cars available on a Tesla robo-taxi network. Alphabet's Waymo, another self-driving competitor, completes more than 150,000 driverless cab rides a week. It owns its taxis.

For now, Tesla's systems are more capable than BYD's. Tesla's FSD product can do most of the driving most of the time, whether the car is on the highway or in a city.

BYD's system will continue to get better, though, raising the stakes for all competitors. That is what always happens in the car business.

Write to Al Root at allen.root@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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February 12, 2025 13:30 ET (18:30 GMT)

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