Tesla price cuts made possible by battery costs plunge as they decimate Chinese automaker margins and worker salaries

Last May, Tesla's battery supplier CATL was preparing to warn its clients that it will have to split the drastic rise in lithium costs with them. Fast forward a year, and CATL had gone in the opposite direction, slashing the price of its lithium phosphate batteries - of the type in the new Model 3 Highland - by 20%.

The nosedive in the price of battery-grade lithium carbonate from its highs last fall also led to a similar reduction in the price of nickel batteries. That's the type Tesla puts in its performance vehicles like the Model S and Model X, or the long-range Model 3 and Model Y variants. The component price reduction and some production cost savings such as the introduction of gigacast manufacturing or removal of redundant parts, allowed Tesla to commence a price war at the beginning of the year. 

Tesla's electric vehicles have fallen in price more than 30% from their peak last year and the cuts continue. The world's biggest EV maker just managed to squeeze the Model X under the government's tax credit price threshold, for instance.

According to a new report, the competition in China finds it hard to keep up. While interviewing industry execs, auto parts suppliers, and workers, Reuters found salary cuts, drastic cost savings, and even factory closures as consequences of the brutal price war that engulfed the world's biggest car market this year.

Some automotive industry workers in China are seeing their salaries cut in half compared to when they started as local companies go into frantic cost reduction mode in order to remain competitive or simply survive. According to one of them, who this summer started taking home 4,000 instead of 7,000 yuan a month:

Some factories exhaust you and are willing to pay you more. Some factories exhaust you, but are stingy. Some factories don't exhaust you, but starve you as salaries are too low.

While Tesla is at the high end of the average hourly wage range in China, it has slowed hiring in the aftermath of the industry's price reductions there. The same reportedly goes for CATL, the world's biggest EV battery manufacturer that counts Tesla among its largest clients.

As another example of the damage that the price cuts are inflicting on the wider automotive industry, suppliers complain that automakers with big purchasing power like Tesla have already requested 10% cost reduction, and they are seemingly not done. For comparison, the norm in previous years has been one request annually, by no more than 5%.

Even squeezing suppliers and workers hasn't helped Chinese automakers escape the price reduction doldrums. Their average profit has slumped drastically to just 4.9% this year, with Tesla and BYD being about the only bright spots due to their disciplined cost controls and vertical integration that allow them to boost demand by lowering prices while still maintaining healthy margins like before.

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