Why Is Car Sales Falling as the Prices Drop?

The recent sharp price cuts on some brands of ICE in the Chinese market have shown a “catfish effect” in the auto market, with over 30 brands having officially announced their promotional offers. In response, the industry association issued a paper calling for a rational approach to the current round of car promotions and the need to pay great attention to the negative impact the promotions have made on the development of the industry.

Among the models with price reductions, ICE of joint-venture brands are the mainstay. According to statistics, the market share of Chinese joint ventures sales in 2022 were 37.8%, down 3.8% compared to 2021. Of 17 mainstream joint ventures, more than half of the sales showed negative growth. We can say that the “lost” market is mostly dominated by independent brands.

On the one hand, independent brands constantly develop upwards, taking up the market space that originally belonged to joint venture brands. In 2022, the market share of Chinese brand passenger cars continued to rise, once exceeding 50%, while the total delivery of passenger cars of joint venture/foreign brands (excluding imported ones) fell by 8.52% year-on-year.

On the other hand, the market share of ICE has been impacted by NEV. From January to February in 2023, sales of ICE fell by 29.5% which is from 2.711 million to 1.912 million units. NEV, by comparison, increased by 23.5% from 624,000 to 771,000 units. 

The industry associations pointed out that since the beginning of the year, some NEV enterprises have lowered their car prices in order to increase their market competence, further diminishing the competitiveness of the traditional fuel cars market, resulting in low sales of some ICE models. Apart from this, factors such as the epidemic and chip shortage disrupted the manufacturers’ plans of production and sales, leaving them much pressure in inventory. As a result, some of the automakers choose to recover costs by offering significant promotions on some of their ICE  models(mostly EOP models) to reduce their inventories. In addition, the upcoming implementation of the National 6B emission standard on 1 July also plays a catalytic role.

Price cuts to deal with inventory to properly recover costs is a normal business measure, but industry associations don’t think that this should turn into such a price war, which will certainly not last long. The auto market should return to a normal order as soon as possible to create a good market atmosphere for consumers.

The industry insiders argue that a widespread price war means that the reshuffling of the auto industry has begun. In the short term, it seems that automakers have indeed attracted some consumers by drastically reducing prices, but in the long term, car-making has a long industrial chain which drives many industries and employment “upstream and downstream”, that is, the price war not only reduces the profits of OEMs, but also brings huge pressure on the profitability of the “upstream and downstream” industry chain. Inevitably, profits will be significantly reduced, even at a loss.

In auto industry, once the Transaction Price (TP) falls, it will never be back or close to the Manufacturer Suggested Retail Price (MSRP). Companies like NIO and Li Auto have stated that they will not follow this round of price wars, nor will they participate in price cuts by reducing car  configurations or consumer rights, but will fight for greater market share on their own way.

It is worth noting that while the price cuts have generated widespread discussion in the industry and among consumers, they have not had a significant effect on boosting sales in the car market. Data shows that domestic passenger car sales in the first two weeks of March were 414,000 units, down 17% year-on-year and 11% month-on-month. According to the industry associations, currently the conversion rate of customers who enter a retail shop and eventually buy a car is low. Most consumers have “a wait-and-see” mindset and a relatively low demand of cars.

Translator：Wei Xiong                                                                  

Reviser：Yan Luo