The rash of recent price cutting in China's auto market could further squeeze the profitability of manufacturers already struggling with slowing demand, analysts have warned.
"The evolving price war in China's car market ... is likely to extend into the second quarter and erode profitability along the entire automobile value chain in 2023," analysts at Fitch Rating said in a report on Thursday.
The steep price cuts were a result of depressed auto sales and the rush by carmakers to clear out their inventories as new national emission standards are set to take effect in July, analysts at Nomura Holdings said in a Tuesday report. They also expect the price war to drag on for several months.
The latest move was made by SAIC Volkswagen Automotive, the joint venture of China's SAIC Motor and Volkswagen, which announced on Thursday discounts of between 15,000 yuan ($2,182) and 50,000 yuan until April 30 on a range of models.
FAW-Volkswagen Automobile, the German carmaker's other joint venture -- with China FAW Group -- launched a trade-in program last week for Volkswagen owners who purchase a new gasoline-powered Tavendor or Talagon SUV.
Slashing prices is not the only trick up automakers' sleeves. A number of companies including Li Auto, Lynk & Co., Hozon New Energy Automobile and Zhejiang Leapmotor Technology this week began to offer a 90-day price match guarantee on new purchases made before the end of March or the end of April.
While many carmakers said the promotions were only limited-time offers, Fitch analysts said they believe Chinese consumers are going to hold off buying in anticipation of even steeper price cuts.
One employee at Leapmotor told Caixin that while the brand has seen an increase in customers visiting its dealerships, some are taking a wait-and-see approach as they think more price cuts could be on the way.
Electric vehicle maker Tesla kicked off the price war at the beginning of the year by offering some steep discounts on several models. A number of domestic and foreign EV makers such as Xpeng and BYD soon joined in before the price-cutting fever spread to the makers of conventionally powered vehicles like state-owned Dongfeng Motor Group in early March.
Auto sales have plunged since a popular vehicle purchase tax cut expired at the end of last year. In the second half of 2022, auto sales volumes grew 12.4% year on year, but shrank 19.8% in the first two months of this year, Nomura's analysts said, citing data from the China Passenger Car Association, an industry group. The contraction occurred even as China lifted strict pandemic controls and economic activity largely normalized, they said.
The current price cutting is reminiscent of the relentless discounts that dealerships offered in the second quarter of 2019, ahead of a previous round of emission standard upgrades that took effect in the middle of that year, Fitch analysts said. Those discounts also distorted the seasonality of auto sales as they encouraged some customers to pull the trigger on purchases that they otherwise would have made later.
Apart from helping with de-stocking, the price cuts will likely spur an industry reshuffle, Huaxi Securities chief auto analyst Cui Yan said in a note on Monday. Cui expects that healthy, non-joint venture car brands will be snapping up a greater share of the market, accelerating overall industry consolidation.
"The price war could drive out weaker carmakers, especially joint ventures," analysts at Ping An Securities said in a Wednesday report, citing the exits of foreign brands including Suzuki Motor and Acura from the mainland Chinese market in recent years.
"For brands that are able to survive on the mainland market, such significant price cuts will inevitably affect the pricing of new products. A long-term price war is not a healthy way for firms to compete," they said.
Sources: asia.nikkei