# The challengers: Tesla, BYD, and the new entrant playbook
In 2023, BYD (a Chinese company that started making rechargeable batteries in 1995) passed Tesla to become the world's best-selling maker of battery-electric and plug-in hybrid vehicles combined. It did this without a single dealership network of the kind that took Toyota or Volkswagen decades to build, and while making its own batteries, chips, and even the ships that carry its cars overseas.
That is the story of this lesson. Challengers did not beat incumbents by building a nicer car. They attacked the cost structure and the margin structure: where money is made along the chain, and who keeps it.
Incumbents (established carmakers like Toyota, Volkswagen, GMGMGross margin is the share of revenue left after subtracting the direct cost of producing goods or services, expressed as a percentage of revenue.View full definition →, Ford, Stellantis) are very good at product. They have a century of manufacturing discipline and enormous dealer networks.
A challenger who only competes on "better product" gets copied within one model cycle (roughly 4 to 6 years). To actually take share and hold it, you need a structural advantage: you make the car for less, or you capture margin that incumbents leak to other players.
BYD and Tesla each found a different structural lever.
The battery is the single most expensive part of an electric vehicle (EV). Industry estimates put the battery pack at roughly 30 to 40 percent of an EV's total cost (estimate, varies by model and year).
Most carmakers buy their battery cells from suppliers like CATL, LG Energy Solution, or Panasonic. That means a big chunk of the car's value, and its margin, leaves the carmaker and lands with the battery supplier.
BYD refused that trade. It makes its own cells, in particular its "Blade Battery," a lithium iron phosphate (LFP) design. LFP uses no cobalt or nickel, which are expensive and geopolitically messy. BYD also makes its own power semiconductors, electric motors, and assembles the whole vehicle.
Vertical integration means owning multiple steps of the supply chain rather than buying them. BYD owns from the raw-material processing near-end through to the finished car.
Here is a simplified worked example (illustrative numbers, not BYD's actual figures):
BYD keeps that $2,000 supplier margin inside its own business. Across millions of cars, that is the difference between profit and loss on a cheap model. It is also why BYD can price a compact EV aggressively and still not bleed cash.
The trade-off: vertical integration requires enormous capital and takes years. If battery chemistry shifts (say, to solid-state cells), a heavily integrated player can be stuck with the wrong factories. Flexibility is the price of control.
Tesla attacked a different part of the chain: distribution.
Traditional carmakers sell through franchised dealers, independent businesses that buy cars from the manufacturer and resell them. Dealers take a margin, negotiate prices with each customer, and control the service relationship. In the US, dealer margin has historically been estimated at several percent of the sticker price, plus service and financing profit.
Tesla skipped dealers entirely. It sells direct to consumer (DTC): fixed prices, online ordering, company-owned stores and service centers.
1. Tesla keeps the dealer margin. That money stays with the manufacturer.
2. Tesla controls the price. It can raise or cut prices overnight across the whole market. In 2022 and 2023 Tesla ran aggressive price cuts that incumbents could not match quickly, because incumbents cannot force independent dealers to slash margins.
3. Tesla owns the customer data and the service relationship, feeding software updates and future upsells.
This is a power-dynamics story as much as a cost story. Tesla removed a player (the dealer) from the value chain and absorbed both its margin and its function.
US franchise laws, enacted decades ago to protect independent dealers from being undercut by manufacturers, restrict or ban direct manufacturer sales in several states. Tesla has fought state-by-state legal battles for years. Some states still limit its stores.
For a good overview of that legal fight, see the Federal Trade Commission's staff comments on direct auto sales, which have repeatedly argued that dealer-protection laws harm consumers.
Incumbents also can't simply copy Tesla. Their dealers are contractual partners and a political constituency. Ford's and GMGMGross margin is the share of revenue left after subtracting the direct cost of producing goods or services, expressed as a percentage of revenue.View full definition →'s EV-only direct-ish experiments have created friction with their own dealer networks.
| Lever | BYD | Tesla |
|---|---|---|
| Primary attack | Cost of the car (battery) | Distribution margin |
| Part of chain captured | Supplier (cells, chips) | Distributor (dealer) |
| Main constraint | Capital intensity, tech lock-in | Franchise law, service scaling |
| Result | Wins on price in mass market | Wins on price flexibility and margin per car |
Notice they attack different players. BYD squeezed the suppliers. Tesla removed the distributors. Both aimed at the same target: keep more of the value chain's margin inside the manufacturer.
The new-entrant playbook is powerful but not magic. It stalls in predictable places.
Service and repair at scale. Direct sales mean the manufacturer must build service capacity itself. Tesla owners have reported long wait times for repairs, exactly the friction a dealer network is designed to absorb.
Trade barriers. BYD's cost advantage runs straight into policy walls. In 2024 the European Commission (the EU's executive body) imposed additional countervailing duties (tariffs meant to offset foreign subsidies) on Chinese-made EVs, on top of the standard 10 percent car tariff. The US has set tariffs on Chinese EVs at a much higher level (reported around 100 percent, as of 2024 policy announcements). A cost advantage can be erased at the border.
Brand and trust in the mass premium segment. Cheap-to-build does not automatically mean trusted. Incumbents still dominate segmentssegmentsDividing a market into distinct groups of customers who share similar needs, characteristics or behaviours, so each group can be served with a tailored approach.View full definition → where buyers pay for heritage, resale value, and dealer proximity.
Capital cycles. Vertical integration is a bet. If demand slows or chemistry changes, the integrated player carries the fixed cost. A lighter, buy-it-in rival can pivot faster.
Knowledge check
1. According to the lesson, why is competing solely on having a 'better product' insufficient for a challenger to permanently take market share from incumbents?
2. What is the core strategic logic behind BYD making its own battery cells rather than buying them from suppliers like CATL or Panasonic?
3. The lesson describes challengers attacking incumbents' 'cost structure and margin structure.' What does this framing primarily emphasize?
4. Select ALL correct answers about why BYD's use of a lithium iron phosphate (LFP) 'Blade Battery' fits its cost-focused strategy.
Select all the correct answers.
5. Select ALL correct answers that describe what constitutes a genuine 'structural advantage' as defined in the lesson.
Select all the correct answers.
Incumbents are not passive. The interesting response is selective imitation.
The balance of power is shifting from "who builds the best car" toward "who controls the battery and who controls the customer." That is the real contest in 2026.