China Automakers in Price War: How Soaring EV Sales are Reshaping the Country's Automotive Industry
Gasoline cars, joint-venture companies and luxury brands fighting for survival in China's evolving automotive market
Despite a slowdown in passenger car sales, electric vehicle (EV) sales in China are soaring. The competition brought on by EVs has become so fierce that gasoline automakers have had to slash their prices to maintain their market share. However, the implications of the rise of EVs extend beyond just a price war. The increasing popularity of EVs is bringing structural change to the entire automotive industry in China.
We discovered a great article on Huxiu.com, a Chinese business information and exchange platform, that delves into the ways in which EVs are reshaping the automotive industry. We have translated the article and highlighted key takeaways, including:
The recent price wars among Chinese automakers, the magnitude, and its impact on industry players
Battles between new EV makers and established brands, including Dongfeng, BMW, Benz, Audi, and BYD.
Our perspective on the future outlook: will the price war persist, and will old automakers lose market share?
Enjoy the read!
Below is our translation:
Behind the fierce price reduction: Gasoline vehicles have really collapsed this time
Everyone has a vague idea that new energy vehicles are the future. However, most people didn't expect the gasoline vehicle market to collapse so quickly.
In early March, the Hubei provincial government, together with automakers and dealers, launched a one-month, astonishing subsidy campaign for many independent and joint-venture brands under Dongfeng, a Chinese state-owned automotive manufacturer. Among them, the Dongfeng Citroen C6 received the highest comprehensive price reduction of 90,000 yuan. That is to say, the "French presidential car," originally priced at 211,900 yuan, could be driven home for just 141,900 yuan.
The results were immediate. Not only did the public lose their stereotype of the car as having an "old car platform," "rear axle leaf springs," "laggy infotainment system," and "outdated," but its inventory in Hubei's 4S dealerships was basically gone by March 8th. The last time French cars were so popular was in the 1990s, 30 years ago.
After Hubei, major auto-producing regions, including Jilin, Sichuan, Chongqing, Anhui, Guangxi, and Guangdong, launched similar subsidy policies. Even SAIC Group, which has no direct connection, launched "Hubei Special Subsidies" for its Cadillac, Chevrolet, MG, and Roewe models, with a maximum discount of 50,000 yuan. However, this wave of consumer car-buying frenzy cannot help but raise some concerns:
After the crazy month of March, can gasoline vehicle companies still survive in the days to come?
Reasons behind: Gasoline Vehicles' indiscriminate price cuts under the circumstances of helplessness
Data reveals that China's gasoline vehicles are facing a catastrophe. From January to February this year, a total of 2,679,000 passenger cars were sold in China, of which 1,909,000 were gasoline vehicles, and 770,000 were new energy vehicles. In the same period last year, of the 3,340,000 passenger cars sold in China, 2,723,000 were gasoline vehicles, and 627,000 were new energy vehicles.
On the one hand, the total market has shrunk by nearly 20%; on the other hand, new energy vehicle sales have increased by 22.8%. When you look at the numbers, gasoline vehicle sales have actually fallen by 30.2%. In fact, such a change in sales was just the last straw that prompted the car-buying subsidy. In 2022, gasoline vehicles sold a total of 14,869,000 units, 2,301,000 fewer than in 2021, equivalent to the sudden disappearance of SAIC Volkswagen and General Motors from the Chinese car market. It seems that gasoline vehicle companies have indeed become the Nokia that was abandoned in the era of smartphones.
However, compared to the unbearable sales figures, not only are the automakers in hell, but so are the devastated dealers. Apart from a few new carmakers such as NIO, Tesla, and Li Auto, which have adopted direct sales models, most automakers do not sell cars directly to users. Instead, they wholesale new cars to dealers. This allows them to mobilize external capital to expand sales channels and outsource subsequent maintenance and customer service businesses to reduce costs. It also helps automakers maintain a good production rhythm and cash flow.
China's automotive industry has experienced rapid growth over the past few decades. Historically, dealers had to use connections to compete for valuable car supplies from automakers, leading to automakers' dominant position over dealers. To achieve revenue targets, automakers often "force sell" new cars to dealers. With the shrinking gasoline vehicle market, dealers have been struggling since last year.
In February of this year, the China Automobile Dealers Association published the "2022 National Automobile Dealer Viability Status Survey Report" (《2022年全国汽车经销商生存状况调查报告》), which deemed 2022 the most challenging year for auto dealers in the past 3-5 years. Dealers' annual sales target completion rates and profitability have all declined, especially the completion rate of annual sales targets, which is particularly shocking.
Among them, 42.1% of dealers have a sales target completion rate below 70%. With the roughest calculation, 30% of the cars these dealers bought from the manufacturer in the past year have become unsold inventory cars. In January-February this year, the total sales of gasoline vehicles shrank by 30%, causing a large number of dealers to be on the verge of collapse.
This explains why the Hubei provincial government joined hands with Dongfeng Group to take the lead in subsidizing its models. When we look back at the sales rankings of various sub-brands in China in 2022, we find that among both independent and joint-venture brands under the entire Dongfeng Group, only Dongfeng Nissan and Dongfeng Honda, two joint-venture companies, made it to the TOP 15 retail sales ranking list. The sales of these two companies last year decreased by 20.9% and 17.8% respectively compared to 2021.
Clearly, if the authorities don't step in, this highly respected automotive group would be in danger. Such market changes are nothing short of catastrophic for strong joint-venture companies like Dongfeng Nissan and Dongfeng Honda, let alone niche brands like Citroen, which are already on the edge of a cliff.
Collapsing reputation of gasoline vehicles
After analyzing the reasons, let's look at the impact of this wave of price cuts. Of course, the most direct impact is the elimination of some gasoline vehicle dealers. After all, in 2022, 45.2% of dealers were already in a loss-making state. Given that the gasoline vehicle market is bound to shrink further in 2023, dealers who can not see a future will inevitably choose to lay off staff or even withdraw from the market.
Sun Shaojun, a Weibo influencer and automotive expert, told me that the market price of gasoline vehicles has lost control after this wave of sweeping price cuts. Ordinary consumers, seeing new car prices reduced by as much as 50,000 to 90,000 yuan, will not explore the deeper reasons behind. People's intuitive feeling will only be: "Gasoline vehicles are worth this much."
It's worth noting that, according to the manufacturer's requirements, the aforementioned subsidies are only applicable to car purchases and registrations within Hubei Province. However, car dealers across the country have made efforts to expand these subsidies nationwide. A search for "Hubei subsidy new car" on Xianyu (a second-hand goods platform) reveals that new cars can be purchased at subsidized prices throughout the country.
Obviously, these cars will have an impact on the national gasoline vehicle market. Sun Shaojun revealed to me that some dealers have already chosen to start layoffs in June this year after seeing this wave of price cuts. "The gasoline vehicle channel has collapsed, and we are likely to witness a major dismantling of the 4S store system, especially for niche brands."
However, the impact of the price-cut wave may be even more far-reaching than everyone imagines. With gasoline vehicles competing for the already shrinking car market with new energy vehicles, new energy vehicles have also started to lower prices. The first to do so is actually BYD.
It's worth noting that Song PLUS (宋PLUS) and Seal (海豹) are both among the top 10 best-selling models in the new energy SUV and sedan categories. BYD's choice to use its best-selling models for a price war demonstrates its determination to win the battle against gasoline vehicles.
Following BYD, Changan Deep Blue (长安深蓝) quickly followed suit, offering a comprehensive subsidy consisting of a 22,000 yuan cash discount plus a 20,000 yuan gift package, which are offered on top of the local subsidy. In addition to Changan Deep Blue, HUAWEI AITO (HUAWEI问界), which has not had good sales recently, has also received a 30,000 yuan car purchase subsidy in Chongqing, where its factory is located, but the total volume is limited to 5,000 vehicles.
"New energy vehicles will definitely be dragged into the water," Sun Shaojun told me. "The battle between new energy vehicles and gasoline vehicles for market share is already unfolding before our eyes." In his view, the substitution of the former for the latter mainly occurs in the market segment of models priced at 100,000 to 300,000 yuan. This mainly involves the price range of best-selling models of Toyota, Honda, Nissan, and Volkswagen brands.
New energy vehicles such as BYD Qin, Dolphin, Han, Song, and Changan Deep Blue are outselling evergreen models like Volkswagen Lavida, Nissan Sylphy, Toyota Camry, and Honda CR-V. With lower prices, cheaper operating costs, and more intelligent features, domestic new energy vehicles are pushing joint venture brands out of the top positions.
What's even more alarming is that new energy vehicles are not content with merely replacing gasoline vehicles. Emerging companies such as BYD, Tesla, Changan Deep Blue, Lixiang, NIO, and Xpeng are competing to carve out their own market share in the Chinese car market.
Is a massive price cut for the (BMW, Benz and Audi) BBA brands imminent?
From my perspective, subtle changes are happening this year for NIO, Xpeng, and Li Auto.
Xpeng's best-selling model P7i started delivery shortly after its March 10th launch, with new cars available overnight in showrooms and stores across the country. Before this, it often took the company several months from the release, launch, to final delivery of a new car. Clearly, the arrival of Xpeng's new president, Wang Fengying, has brought about a welcome change in the pace of product delivery.
For NIO, the company, which once dragged the launch-to-delivery cycle of the potentially popular ET7 model for over 15 months, resulting in only mediocre sales, has finally learned its lesson. They announced the quick launch and delivery of two new models in the first half of this year.
Lixiang, which has already achieved the goal of delivering new cars the month after their launch, is also making the sales pace even faster. Sun Shaojun has learned that Lixiang is currently working at full capacity to produce the L7 model to minimize the waiting period for customers from order to delivery. Some cities already have stock available, allowing customers to purchase the car on the spot.
"To put it bluntly, the old practice of 'drawing the pie first, and then serving it half a year later' is no longer viable," Sun Shaojun told me. "Customers need to see and buy, and drive home a new car as soon as they place an order."
The purpose of all this is to capture the market share of luxury brands like BBA. As the market acceptance of new energy vehicles continues to improve, customers who used to only choose luxury brands are starting to include new energy vehicles in their purchasing options. In fact, in key cities, high-end brands like NIO and Lixiang have already surpassed BBA competitors in sales for their comparable models. The next move for everyone is to accelerate channel deployment in third and fourth-tier cities and below, further penetrating the luxury car market.
However, the most dangerous aspect for BBA, especially BMW and Mercedes-Benz, is that they have not launched competitive new energy models in the market below 500,000 yuan. It's worth noting that the out-the-door price of the BMW i3 has fallen from over 300,000 yuan to 250,000 yuan, and the iX3 has simply opted for a penetration pricing strategy. Mercedes-Benz's EQA and EQC have hardly established a presence among consumers, not to mention the EQE and EQS, which are priced alongside the E-Class and S-Class.
"If this year is the focus of new energy vehicles' attacks on gasoline vehicles, then next year will be a full-scale battle," Sun Shaojun said in the end, "If there are no major changes in the situation, the entire new energy vehicle sector will join together, leaving gasoline vehicles with nowhere to go.""
During a live broadcast on the automotive industry a few days ago, a Weibo influencer commented on the current price reduction of gasoline vehicles:
"Gasoline vehicles are done; I'm happier these days than during holidays."
Frankly, as an electric vehicle owner myself, I felt somewhat uncomfortable hearing this statement. According to data released by the National Bureau of Statistics, as of 2021, there were 5.43 million people directly employed in China's automotive industry, accounting for 2.5% of the secondary industry's employed population. The upstream and downstream employment driven by the industry amounts to tens of millions of people.
In other words, nearly one-tenth of China's employed population relies on the automotive industry for their livelihood. If the industry experiences overly dramatic or even tragic reshuffling and restructuring, it will inevitably bring a certain degree of impact on society. Although new energy vehicles are rapidly emerging, it is important to consider the fate of those who are employed in areas surrounding traditional fuel cars, such as those who engage in research and development, production of engines and transmissions, as well as sales, maintenance, and production of parts. What will happen to these people is a question that requires special attention.
After all, although individuals are more flexible than companies, the knowledge and experience accumulated over years or even decades being wiped out in an instant is always a painful process.
We are all grains of sand in the tide of time. As we have seen or experienced too many times over the past few years, perhaps there is not much each of us can do about it, but the least we can do is to abandon the mentality of onlookers and not observe the fate of those who are impacted with indifference.
The shift towards EVs is bringing irreversible structural changes that are reshuffling the automotive industry and creating opportunities for new automakers. Local automakers have already risen in the mid-price range (300,000 - 500,000 RMB, or equivalently 44,000 - 73,000 USD), among them many have the ambition to go global.
We think the overall slowdown of car purchases and post-Covid economic difficulties have driven this round of price war. However, automakers will need to be cautious with price reductions going forward, as blindly slashing prices can harm brand image and is not sustainable. BYD appears to be the most confident and prepared to expand its business despite the slowdown, as evidenced by its hiring expansion.
Keep reading with a 7-day free trial
Subscribe to Baiguan - China Insights, Data, Context to keep reading this post and get 7 days of free access to the full post archives.