Chinese automakers rev up price war in race for market dominance

(By Caixin journalists An Limin and Han Wei)

A brutal price war is raging across China's auto sector, catalysing a profound overhaul of the world's largest car market, as makers of new energy vehicles and conventional fossil fuel cars face off to win a greater share of a market rattled by slowing sales.

The first shot was fired by US electric vehicle (EV) maker Tesla Inc., which late last year rolled out massive subsidies and price cuts to spur sales. A flurry of domestic and foreign EV-makers followed suit, with BYD Co. Ltd., XPeng Inc., Nio Inc. and Volkswagen AG all racing to win customers by offering generous discounts.

Since early March, the price war has escalated, spreading to makers of fossil fuel-powered vehicles, with a number of local governments also getting in on the act.

On 10 March, Chang'an Automobile Co. Ltd. kicked off a sales campaign offering an up to 40,000 RMB (US$5,800) discount on purchases of several fossil fuel and EV models. The next day, Chery Automobile Co. Ltd. announced a programme to provide over 10 billion RMB in subsidies to buyers.

SAIC Volkswagen Automotive Co. Ltd., a joint venture between SAIC Group and Volkswagen, also unveiled broad price cuts on its vehicles.

Perhaps in one of the most eye-popping offers, Dongfeng Motor Group Co. Ltd., with a subsidy programme jointly funded by the Hubei provincial government, slashed prices of its Citroen C6 models by as much as 90,000 RMB - or almost 40% of the listed price.

The cut-throat competition will most likely drive some automakers out of business, while accelerating the pace of new energy vehicles replacing conventional cars in certain segments of the auto market, industry analysts said.

"It you don't cut prices right now, it's as good as waiting to die," said Xiao Yong, deputy general manager of Aion, the EV brand of Guangzhou Automobile Corp. (GAC). So, after intense internal discussions, Aion finally decided to "abandon any notion of luck or wishful thinking, and be fully prepared for a tough battle," Xiao told Caixin.

The fierce price war has erupted as China's auto sector enters lean times, with sales plunging since a government subsidy on EV purchases expired at the end of last year.

Consumer spending has also been dented by severe disruptions throughout the three years of the pandemic, with harsh restrictions on movement such as lockdowns, that at times saw hundreds of millions under some form of isolation order.

In the first two months, passenger car sales shrank 19.8%, after recording a 12.4% expansion in the second half of 2022, as consumers rushed to buy ahead of the incentives ending, according to data from the China Passenger Car Association (CPCA).

Despite the massive price cuts, car sales during the first 19 days of March dropped 8% year-on-year and 4% from the same period last month, CPCA data showed.

The price war has been triggered by multiple short-term factors, said Chen Binbo, chair of Wuhan Automobile Industry Association. In addition to the end of government incentives, the scheduled implementation of a stricter emission standard from 1 July also pressed automakers to accelerate sales of old models, said Chen.

"But the fundamental cause of the price war lies in the shift of the supply-demand dynamics," Chen said.

Nobody wants a price war as it is a double-edged sword that hurts both rivals and yourself, said a sales manager at a leading joint venture automaker who declined to be named. He expected the price war to ebb by the end of March as companies adjust production and run down inventories.

But others are less optimistic. Sun Yong, editor-in-chief of auto industry news portal Cheshi Technology Inc., said the price war may drag on throughout 2023 if demand remains weak.

While there isn't a consensus on how long the price war may last, a profound industry revamp is widely expected. Only companies that can significantly reduce costs through technological advances and create new value can survive, analysts said.

Some in the industry are calling for the government to step back in by offering more supportive policies to bolster auto sales and thus ease the incentive to slash prices. Indeed, the government has already extended the tax exemption on purchases of new energy vehicles that was due to expire at the end of last year for one more year to the end of 2023.

In May 2022, China announced a policy to halve the auto purchase tax on low-emission cars for six months as part of a broad set of measures to stimulate the slowing economy.

Since the incentive only expired at the end of last year, it is unlikely that the government will introduce new stimulus measures, said Lang Xuehong, deputy secretary-general of China Automobile Dealers Association.

The effects of government incentives have become increasingly debatable as the dynamics of China's auto market change. While such stimuli have been less effective in spurring sales during market downturns, analysts note that their withdrawal has also triggered market fluctuations.

"Neither national-level incentives nor local government subsidies can alter the rules of market competition," said a sales manager at a joint venture carmaker.

Compared with stimulus, a more effective measure to ease automakers' current predicament is to postpone the introduction of the new emission standards, which will disqualify many of the old models from vehicle registration, said the manager.

Cui Dongshu, chairman of CPCA, told Caixin that the association has proposed to authorities delaying the change to the emission standard to the end of 2023 from the original plan of 1 July. But as yet no decision has been announced.

In the meantime, flamboyant billionaire Elon Musk has set an ambitious target for Tesla to sell 1.8 million vehicles in 2023, which is 1.37 times the EV maker's actual sales last year. But he has also registered pessimism regarding the economic situation this year, likening it to the dire state of affairs in the US following the financial crisis of 2008.

Tesla's prices have been a rollercoaster ride since early 2022. In the first quarter of last year, it raised prices several times due to the increase in the costs of the raw materials used to make the batteries used in its cars. But even so, consumers still dutifully queued up for their vehicles.

The turning point came in mid-2022 after Tesla expanded production capacity at its Shanghai factory. According to Tesla's financial report, the plant's annual capacity now exceeds 750,000 vehicles per year. But industry analysts widely estimate that its actual production capacity has reached 1 million vehicles.

However, market demand did not keep pace with Tesla's expansion. In September, Tesla indirectly lowered prices by offering an 8,000 RMB subsidy for purchasing insurance with a new vehicle.

In October, Tesla officially announced price cuts, with the highest reduction reaching 37,000 RMB per vehicle. These measures to some extent boosted Tesla's sales, but overall demand continued weakening.

Other EV makers have also felt the pinch of weak sales. The Chinese trio of Nio, Xpeng and Li Auto Inc. all failed to achieve their sales targets in 2022, the companies' financial reports showed.

Globally, Tesla's monthly orders dropped from 476,000 vehicles in July 2022 to 163,000 vehicles in December, according to data provided by TroyTeslike, a Tesla production and sales data tracking service provider.

In China, monthly orders dropped from 176,000 vehicles in July to less than 6,000 vehicles at the end of the year, equivalent to one-week's production at Tesla's Shanghai factory, according to TroyTeslike.

Amid the gloomy results, Tesla doubled down on its sales campaign. With another discount in January, Tesla's locally made cars are now as much as 14% cheaper than last year, and in some cases almost 50% less expensive than in the US and Europe, according to Caixin calculations.

The deep discounts have helped Tesla to revive sales. Musk said in a January earnings call that the company had received nearly twice as many orders as its production capacity that month.

Tesla's archrival BYD quickly stepped in with the release of a new hybrid model in early February at lower prices. In March, BYD expanded discounts on some of its most popular models.

In 2022, BYD sold 1.8 million fully-electric and plug-in hybrid vehicles, making it the world's largest EV maker. The company is reportedly eyeing 4 million in auto sales in 2023, according to several domestic media reports citing internal memos from company meetings.

Loss-making EV startups including Li Auto and Xpeng have hastily jumped onto the price-cut bandwagon.

A price war instigated by the two biggest players left others with little option but to follow suit, Li Xiang, CEO of Li Auto said in a March press briefing.

Analysts have sounded alarms about they've termed "survival challenges". A market slowdown and the end of government incentives will inevitably squeeze some bubbles out, after years of rapid growth in the EV sector that attracted a large number of players into the business, said an industry analyst who declined to the named.

The price cuts on EVs have made them even more attractive compared with gasoline cars, further squeezing traditional carmakers amid the market downturn, Li Quanchao, a business strategy manager at a unit of China FAW Group Corp.

Indeed, conventional carmakers have seen a steeper slump in sales. In 2022, sales of fossil fuel powered passenger vehicles dropped 13% year-on-year to 15 million units in China, while EV sales rose 90% to 5.7 million units, according to CPCA data.

In the first two months this year, sales of traditional cars slid 29% from a year ago, according to the data.

Compact and mid-size cars, the best-selling models of most conventional carmakers, experienced the most significant sales decline, losing market share to Tesla and BYD, according to data from the China Association of Automobile Manufacturers (CAAM).

In the first two months, sales of fossil fuel powered compact cars declined 25.7% year-on-year while sales of traditional mid-size cars slid 26.6%, CAAM data showed.

Joint venture carmakers that have moved slower than other domestic rivals in China's auto electrification transition have been hit hardest in the market shift, an auto analyst at a securities firm said.

Dongfeng Motor, which has joint ventures with Nissan Motor Co. Ltd., Honda Motor Co. Ltd. and Stellantis N.V., saw total car sales plunge 51% during the first two months, after a 11.2% decline last year.

A person close to Dongfeng Motor told Caixin the market downturn in 2023 has been worse than the company expected, and consequently it has failed to adjust its production in time. That has led to a surge in inventories.

Chinese carmakers are no strangers to price wars, with the industry undergoing numerous rounds of intensely competitive periods over the past two decades. This included one in 2008 after the Global Financial Crisis and in 2018 when China's auto market posted its first annual sales contraction in 20 years.

But the situation looks much grimmer this time as China's economy is still struggling to recover from three years of strict Covid-19 controls.

The pandemic has significantly affected people's income and demand for cars, as many people have turned more cautious when it comes to spending on large ticket items, said Chen from the Wuhan Automobile Industry Association. Chen predicted an annual decline in China's passenger car sales this year and the intense competition to continue.

This year's price war also marks the first major incursion by EVs into market territory traditionally dominated by traditional cars, said Chen. The 2023 price war can be seen as a "world war between gasoline and electric cars", said an industry analyst.

It has underscored the competition between gasoline cars and EVs, as well as the struggle between China's domestic auto brands and joint venture brands, said Zhang Yichao, a partner of consulting firm EY-Parthenon.

It is still unclear who will win.

New energy vehicles have gradually taken over the market for cars priced below 100,000 RMB in the past few years, and will further expand into the 100,000-150,000 RMB bracket that is currently dominated by gasoline cars, said Zhou Lijun, chief analyst at Yiche Research. In the higher-end market, conventional carmakers still hold the upper hand against EVs, said Zhou.

As emission standards rise, mid-to-low-priced gasoline cars are losing their price advantage. Chinese domestic brands will use the trend of electrification as an opportunity to dominate the market while foreign brands continue to hold onto market share in the high-end market, said a senior executive at a foreign carmaker.

But a sales manager at an auto joint venture disagrees. He said that the ongoing price war is short term and that joint venture companies still retain their advantage due to their huge customer base and a mature service network. As EV purchases still enjoy some tax incentives, the real competition between electric and gasoline cars has yet to start, according to the manager.

The price war is seen by some industry insiders as the prelude to a looming revamp in China's auto industry, which may drive many companies out of business.

China's automobile industry will undergo a similar wave of reshuffling like that seen in the aviation manufacturing industry, which left only a few players in the market, said Richard Yu, CEO of Huawei's Consumer Business Group, who also in charge of the company's smart car business, late last year. The main players in China's auto market will eventually number no more than five, said Yu.

There are more than 80 passenger car manufacturers operating in China, with over 100 brands, including joint ventures involving nearly ten multinationals, according to CPCA data.

Eighty percent of gasoline-powered auto brands will be squeezed out of the market or restructured over the next three to five years, Zhu Huarong, chair of Chang'an Auto, said last year.

The key to survival is cost control and advances in technology, said Gan Jiayue, CEO of Geely Automobile Group, during an earnings call on 21 March. Geely is learning from Tesla how to adopt new technologies such as integrated die casting to improve production efficiency, according to Gan.

A focal point of future competition is auto intelligence. Autonomous driving is set to change the landscape of the auto industry and Chinese companies are striving to catch up with industry leaders, said Li Auto CEO Li. By 2024, the performance of autonomous driving systems among China's leading automakers will reach that of Tesla at the end of 2022 and early 2023, said Li.

The catch-up will be challenging. As all companies are taking on Tesla, the costs of the technology will remain high, said an autonomous driving algorithms expert. The task of achieving the transition and overcoming the market downturn won't be easy for Chinese companies, said the expert.

This article was first published by Caixin Global as "Cover Story: Chinese Automakers Rev Up Price War in Race for Market Dominance". Caixin Global is one of the most respected sources for macroeconomic, financial and business news and information about China.

Related: Chinese EV manufacturers face tough challenge against Tesla amid subsidy cuts | The world's EV supply chain is fracturing | China's electric vehicle makers race for Southeast Asia market share | Huawei: China's Tesla challenger in the making?