Chinese carmakers reduce discounts after Beijing’s warning, but no end in sight to price war
Many carmakers have reduced discounts in response to Beijing's directives, but they may cut prices again to maintain market share
Chinese carmakers have refrained from offering steep discounts to align with Beijing's efforts to protect a vital industry, but an end to the prolonged price war remains elusive, as the sector grapples with overcapacity and weak consumer demand for high-ticket items.
The average discount offered by mainland Chinese electric vehicle (EV) and petrol car manufacturers fell to 16.7 per cent last month from an unprecedented 17.4 per cent in June, according to a recent JPMorgan report.
"This is encouraging, as intense competition - especially after the Shanghai Auto Show in April - sent industry-wide discounts to a record high of over 17 per cent in May, June and early July, the highest since we started tracking pricing trends in China in 2017," said Nick Lai, head of auto research in Asia-Pacific at JPMorgan.
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"However, the root cause of the challenging price environment is overcapacity. We may need to be patient to see a sustainable [and] better price environment in the long term."
JPMorgan's data covered 40 foreign and Chinese car brands across 1,000 variants, including imports.
In late May, the Chinese government intervened in the automotive market over concerns that fierce price competition could jeopardise the EV sector, where mainland companies lead globally, according to analysts.
The Ministry of Industry and Information Technology warned that carmakers initiating price cuts would face penalties, although it did not mention specific measures.
Since July, many carmakers have begun to reduce their discounts in response to Beijing's directives, but they remain watchful and may cut prices again to maintain market share, according to car dealers.
"Every carmaker wants to stay ahead because the overall market demand is stagnant," said Zhao Zhen, a sales director at Shanghai dealer Wan Zhuo Auto. "Unless the government takes strong actions to prevent price reductions, a new round of discount wars cannot be ruled out."
Among the mainland's 50 or so EV manufacturers, only BYD, the world's largest player; Li Auto, Tesla's closest competitor in China; and Aito, backed by telecommunications equipment giant Huawei Technologies, are profitable.
Lai said the net profit margin for Chinese carmakers averaged around 4 per cent, compared with 7 per cent to 8 per cent for leading international brands.
Fewer than 10 per cent of EV brands in China were expected to turn a profit in the next five years, as their margins faced further pressure from discount wars and chronic overcapacity, global consultancy AlixPartners said last month.
Stephen Dyer, Greater China co-leader and head of Asia automotive practice at AlixPartners, said mainland EV manufacturers selling fewer than 1,000 units per month were likely to be pushed out of the market soon.
Only half of the nation's EV production capacity - about 20 million units - was used last year, according to Goldman Sachs.
"A grim reality is that Chinese consumers are cautious about making large purchases," said Ding Haifeng, a consultant at Shanghai-based financial advisory firm Integrity. "They are inclined to buy cheaper cars, and big discounts appeal to them."
He added that EVs priced below 100,000 yuan (US$13,920) and featuring basic self-driving systems and digital cockpits typically sold well because consumers believed they offered value for money.
Still, the market was expected to benefit from buyers seeking to take advantage of tax breaks on new-energy vehicle purchases, which would be phased out by year's end, according to a Fitch Ratings report last week.
Currently, mainland buyers are exempt from sales tax on EV purchases. However, starting in January, consumers will be subject to a 5 per cent tax until the end of 2027, after which the tax will increase to 10 per cent.
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