Musk's comments come after Warren Buffett-backed BYD (002594.SZ) - with its cheaper models and a more varied lineup -overtook Tesla as the world's top-selling EV company last quarter, despite Tesla's deep price cuts through 2023.
Chinese car companies were the "most competitive" and "will have significant success outside of China, depending on what kind of tariffs or trade barriers are established," Musk said on a post-earnings call with analysts on Wednesday.
"If there are no trade barriers established, they will pretty much demolish most other car companies in the world," he said. "They're extremely good."
Musk has reason to be concerned.
He sparked a price war last year to woo consumers hit with high borrowing costs, in turn squeezing Tesla's margins and worrying investors. On Wednesday, Musk warned Tesla was reaching "the natural limit of cost down" with its existing lineup.
Tesla plans to start producing a cheaper, mass market compact crossover codenamed "Redwood" mid-2025 to compete with inexpensive rivals, Reuters reported on Tuesday. Musk on Wednesday confirmed that Tesla expects to start production of its next-generation EV at its Texas factory in the second half of 2025.
But Chinese EV makers, adept at keeping costs in check with a stable supply chain, are moving fast. With rising competition and excess capacity in China, many are now working on rapidly expanding their foreign footprint.
SAIC Motor (600104.SS), for instance, has been placing orders for more vehicle vessels in its fleet to counter shipping costs as it looks to boost sales overseas.
"While automakers such as BYD and Nio are middle-of-the-pack with reliability, durability and safety, they enjoy high demand in China with innovation such as in-car technology and battery swapping," Spencer Imel, a partner at consumer insights firm Lansgton.
"That, we believe, will be an important ingredient and a differentiator in their future growth overseas," Imel said. He noted, though, that Chinese car companies still had extremely low brand awareness in the United States.
Musk's comments also come as the U.S. presidential election picks up pace. President Joe Biden has said China was determined to dominate the EV market and that he "won't let that happen".
Former President Donald Trump, who is again seeking the Republican nomination for president this year, has signaled that he would double down on stronger tariffs if elected, calling for a universal 10% tariff on all imports into the U.S. and revoking China's most-favored-nation trading status.
Musk on Wednesday said there was "no obvious opportunity" to partner with Chinese rivals but Tesla was open to giving them access to its charging network and licensing other technologies such as self-driving.
Europe has also taken a protectionist stance towards Chinese EV makers. Last year, the European Commission launched an investigation into whether to impose punitive tariffs to protect European Union producers against cheaper Chinese EV imports it says are benefiting from state subsidies.
