The risk of mixing politics and business

Last week, the US Supreme Court upheld the decision to force the divestiture or banning of the Chinese app TikTok. President Donald Trump said he will let it keep operating for a while, but then plans to force through a deal which could include US government ownership of the app.

The fear with TikTok is the Chinese government would use it to weaken the US and subvert its politics. So far, there is no evidence of this, but, the Supreme Court said even though China had yet to use its influence, the risk it might do so was “a reasonable inference based on substantial evidence”. In other words, China hasn’t done anything yet, but it might.

This logic has also dragged down the share price of the world’s fastest-growing electric vehicle maker, BYD. The Chinese company announced it sold 4.3mn EVs and hybrids in 2024, ahead of its 3.6mn target. Of these 1.76mn were “pure” EVs, which puts it fractionally behind the US's Tesla, which sold 1.79mn. On most financial metrics BYD and Tesla deserve similar valuations. The Chinese company is growing faster – revenue was $105bn last year, up 71 per cent in the past two years. In comparison, Tesla made $99.6bn, just 22 per cent higher. Yet, Tesla trades at a forward price to earnings ratio of 124, compared with just 15 for BYD.

Despite the slower growth, a case can be made for Tesla's valuation. It has a higher operating margin – historically around 15 per cent and roughly 10 per cent now despite recent price cuts. BYD’s is nearer 5 per cent. Tesla’ is also moving towards autonomous vehicles, which could be hugely profitable.

But, the main reason for this difference is that BYD is Chinese. The EU has levied an additional 17 per cent tariff on BYD vehicles while the US has a 100 per cent tariff. In fact, the US has recently passed rules to outright ban Chinese automotive hardware and software. At the time, commerce secretary Gina Raimondo told Reuters: "It's really important because we don't want 2mn Chinese cars on the road and then realise...we have a threat."

Initially, the concern was that BYD had an unfair advantage given it received $3.7bn in Chinese government subsidies. The argument was that tariffs were just levelling the playing field. However, since then, Raimondo has made it clear it’s because the US government simply doesn't trust the Chinese.

The exact opposite is happening at Tesla and rather than be dragged down by government links, Tesla's share price is buoyed by it. Since Trump’s victory shares are up 80 per cent while its CEO, Elon Musk, has been sending out hundreds of X posts a day about politics, and will be an active member of Trump's government.

How much of an impact Trump could have on Tesla’s earnings is up for debate. Analyst Dan Ives from Wedbush Securities says he expects Tesla "carve-outs" in any Chinese tariffs. In this situation, Tesla would be able to manufacture cars in Shanghai without import restrictions, allowing it to benefit from lower costs. All the while its competitors who do similar would face crushing tariffs. The market has put a high value on this scenario. In fact, the $550bn added to Tesla’s market cap since the election is worth five times BYD. 

The market assumes Musk’s foray into politics will only bestow gifts on Tesla, but investors would be wise to look at the longer-term picture.

It wasn’t long ago that BYD was more highly valued than Tesla. In June 2022, it traded at 81 times forward earnings, reflecting its rapid government-subsidised growth. But this didn’t last long. Eventually, these subsidies became a stick for other governments to hit it with, and state help became a hindrance, rather than a benefit.

Tesla’s valuation has a political halo at the moment, but BYD is a warning. Ancient philosopher Aristotle warned that “every virtue carried to an extreme, is a vice”. He meant when patience becomes passivity, confidence becomes arrogance and love becomes obsession. For Tesla, it means subsidies becoming tariffs and “carve-outs” in the US becoming bans elsewhere.

Aristotle urged people to pursue the “golden mean”. For CEOs, this means focusing on their business and generating consistent returns rather than pursuing short-term political wins. Share prices did not used to swing so much based on political events, but this is the new world we live in. For now, the political winds are blowing favourably for Tesla, but that just means when they stop, it will find itself a lot further from home.