Will the Price War in Auto Market Ever End as Automakers are Addicted to Price Cuts?

Credit: Visual China

BEIJING, July 14 (TiPost) —— GAC Mitsubishi, a joint venture between Guangzhou Automobile Group Co., Ltd., Mitsubishi Motors Corporation, and Mitsubishi Corporation, announced on Wednesday that it will optimize its staffing structure, which is seen as a euphemism for layoffs. The automaker has suspended production for more than three months.

After half a year of price cuts, 16 car companies, including Tesla, FAW, Dongfeng and NIO, signed the Letter of Commitment to Maintain a Fair Market Order in the Auto Industry. The day after the signing of the commitment, Tesla, FAW-Volkswagen, and SAIC-Volkswagen all announced price cuts. Soon this collective commitment on prices was revoked due to a violation of the Anti-Monopoly Law.

The 16 car companies occupy about 90% of the domestic market, and their inability to comply with the commitment is also the status quo of the auto industry.

Carmakers, whether they are fuel carmakers or EV producers, have been all involved in a price war this year. Against the backdrop of declining sales, the transition to new energy, reducing inventory to get funds back by price cuts have become the common approach of many enterprises to the competition.

A major reason for carmakers participating in the price war is their high inventories. According to the latest issue of VIA (Vehicle Inventory Alert Index) released by China Automobile Dealers Association, China’s automobile dealers’ inventory alert index in June 2023 was 54.0%, up 4.5 percentage points year-on-year. The Inventory Alert Index was above the line. This means that funds locked up in the form of inventories had been greater than circulating funds, and the auto distribution industry was in a downturn.

As the auto industry has been dominated by new energy vehicles in recent years, the market of fuel vehicles has been severely squeezed. Car sales of Dongfeng Group, for example, totaled 2,464,500 units in 2022, a year-on-year reduction of 11 percent. In January this year, its sales also fell by more than 60% year-on-year. The Hubei government launched a multi-model subsidy policy jointly with the Dongfeng Group in March this year to promote sales of fuel models.

GAC MITSUBISHI is also forced to transit to making new energy cars. In the past, GAC MITSUBISHI was extremely dependent on the sales of the main model Outlander. Outlander’s sales have plummeted for four consecutive years since 2019. The monthly sales of this model were only more than 300 units in February this year, and after a price cut of 30,000-40,000 yuan, the inventory is still high. It also put its hopes on its transition to new energy vehicle, but less than 200 units of the pure electric model Airtrek were sold in the first quarter of this year, and the sales in April and May were no more than double digits combined.

In accordance with the Announcement on the Implementation of the National VI Emission Standards jointly issued by the Ministry of Ecology and Environment, the Ministry of Industry and Information Technology, and other departments, China’s stage 6 emission standard was fully implemented nationwide on July 1, 2023. Models that failed to meet the stage 6 emission standard could not be sold in the market, forcing carmakers to sell the cars at a low price.

As major automakers are in a transition to making new energy cars, the competition is set to become even more fierce. According to the data from CPCA, the penetration of new energy cars in China reached 35.1% in June, compared with 27.3 percent in the same period of 2022. Some analysts believe that the auto industry is entering a stage of consolidation with the slowdown of the business growth, which means some carmakers may be squeezed out of the market. The trouble for GAC Mitsubishi may be just a beginning of many more to come.     

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