BYD Co. Ltd. (BYDDF) just did something remarkable: it overtook Tesla (TSLA) as the world's biggest seller of electric vehicles. For a company whose name literally stands for "Build Your Dreams," this feels like the ultimate achievement. Founder Wang Chuanfu, a low-profile chemist who started BYD as a battery maker back in 1995, finally got his comeback against Elon Musk, who famously mocked the Chinese company as a competitor more than a decade ago.

The numbers tell a dramatic story. BYD sold 2.26 million EVs globally in 2025, powered by an astonishing 145% year-over-year growth in overseas markets. Meanwhile, Tesla's battery-powered car deliveries fell 8.6% to 1.6 million last year, marking the largest annual drop in the company's history.

Within China, where domestic brands already dominate, Tesla's sales declined for the first time since its Shanghai gigafactory opened in 2020, dropping more than 5% to around 620,000 vehicles. BYD didn't just win at home either. The Shenzhen-based automaker also outpaced Tesla in both Britain and Germany, showing that Chinese brands are starting to crack more affluent Western markets.

Part of BYD's success comes from playing a different game entirely. While Tesla focuses on premium vehicles, BYD has aggressively targeted the lower end of the market. Its Seagull models start at around just $8,000 and already include the company's own "God's Eye" self-driving system. That's a world away from Tesla, whose entry-level Model 3 starts at $35,000 and has only gained partial approval to operate assisted driving in China.

Beyond car making, BYD has invested heavily in energy storage and smart driving systems, strategic moves that could help offset margin pressure from the brutal price war that began in China and is now being exported abroad by Chinese EV brands.

The Profitability Problem

Here's where the dream starts looking more like a nightmare: BYD is scaling up fast, but it's not translating into higher profits. In fact, it's doing the opposite.

In the third quarter of last year, BYD reported its net profit slumped 32.6% to 7.8 billion yuan ($1.1 billion), representing its steepest fall in over four years. Revenue also fell for the first time in over five years to 195 billion yuan, a sharp reversal from strong double-digit growth in 2023 and 2024.

At first glance, BYD's profitability looks competitive with Tesla. Its gross margin was 17.9% in the third quarter, roughly equal to Tesla's 18%. But dig deeper and the picture gets concerning. A Morgan Stanley report showed BYD's per-vehicle profit fell to just 4,800 yuan (around $670) in the second quarter, down from 8,000 yuan the previous quarter. That's a fraction of Tesla's roughly $6,000 per vehicle in 2024.

The challenge isn't going away. Cutthroat competition in China, where rivals race to sell cars on razor-thin margins and most companies remain unprofitable, threatens to further compress BYD's profitability. Higher vehicle purchase taxes, reduced government subsidies for lower-end EVs, and ongoing price wars will likely mean an even more brutal year ahead for BYD and other Chinese car brands.

Meanwhile, China's EV market is showing signs of cooling after several years of explosive growth. Analysts at S&P Global predict China's overall car sales, roughly half of which now come from new energy vehicles, will actually fall in 2026. That leaves BYD and its peers with little choice but to subsidize consumers further, squeezing margins yet again.

Overseas Expansion Gets Complicated

As pressures mount at home, BYD is racing to localize production on a mass scale in Southeast Asia, Latin America, and Europe. The strategy makes sense in theory: sidestep tariffs and speed up delivery cycles by building where you sell.

But building plants overseas has become far more complex. Governments in countries from Brazil to Mexico are scrutinizing BYD's plans to build local factories, worried about the economic and political implications. Meanwhile, China itself is increasingly concerned about transferring cutting-edge technologies to those markets, creating a regulatory squeeze from both sides.

The Shadow Financing Problem

Then there's the issue most investors have overlooked: a massive supplier financing scheme that BYD is now being forced to unwind.

BYD pioneered what it called the Dilian system, essentially issuing electronic IOUs to its vast web of suppliers instead of making immediate payments. The system ballooned to more than 400 billion yuan ($57.3 billion) in such IOU debt as of May 2023, according to the latest data released by the company.

This arrangement allowed BYD to stretch payment cycles to its suppliers to 127 days on average, above the industry average of 108 days, according to a Reuters report last November. Data compiled by Bloomberg showed BYD took an average of 275 days to pay its suppliers in 2023. In many cases, suppliers used their Dilian notes as collateral to borrow more money from small banks or private lenders to keep funding their operations, creating a complex web of financing that has largely escaped official scrutiny.

Under regulatory pressure to abandon the tool and take pressure off its suppliers, BYD pledged last summer to shorten payment cycles to 60 days. But exiting Dilian is no simple task, and it's going to show up on the balance sheet.

BYD's debt ratio stood at around 71% as of the third quarter of 2025, according to its latest disclosure. But if you include the outstanding 223 billion yuan the company owed in trade payables at the end of last September, BYD's actual debt ratio would soar to almost 96%, according to calculations using company data.

What the Smart Money Is Doing

Despite these mounting headwinds, the investment community still sees BYD as undervalued. Among 28 analysts polled by Marketscreener, 23 gave the company a "buy" or "outperform" rating, while only one recommended a "sell." Analysts polled by Yahoo Finance expect the company to return to both revenue and profit growth this year.

Billionaire investor Charlie Munger, Warren Buffett's longtime business partner, said in 2023 that BYD was so far ahead of Tesla in China that it was "almost ridiculous." He later praised founder Wang Chuanfu as better at "actually making things" than Elon Musk.

But here's the thing: after a highly lucrative 17-year run, Munger and Buffett's Berkshire Hathaway, which made headlines when it acquired 10% of BYD in 2008, quietly disposed of its remaining stake last September. That lone vote of no confidence might speak far more loudly than all the bullish analysts combined.

BYD achieved its dream of overtaking Tesla in unit sales. Now comes the harder part: proving it can turn that volume into sustainable profits while unwinding a shadow financing system, navigating increasingly hostile overseas markets, and surviving a domestic price war that shows no signs of ending. The dream was always the easy part. Making money from it? That's the real challenge.