China's electric car price war

Chinese automakers are forecasting record sales in 2023. Production rose 10.8% to 26.94 million units in November, while the China Association of Automobile Manufacturers (CAAM) expects sales to top 30 million vehicles for the whole of last year.

But many companies are having trouble celebrating as price wars continue to eat into profits and competition in the electric vehicle market intensifies. Prices fell 8.4% last year, after falling 1.9% in 2022, according to Hao Hong, director of marketing and brand management at Shanghai Automotive Industry.

"This year will decide who wins and who loses, who survives and who goes," Liu Luochuan, director of the strategic development research center at Dongfeng Motor, toldCaixin.

CAAM expects 2024 sales growth to slow to 3%, with exports still rising, while fierce domestic competition could lead to consolidation or even the elimination of some manufacturers in 2025 and 2026.

Lost "milk bottle"

In 2009, China introduced subsidies for electric vehicles, which could be as high as 12,600 yuan ($1,767) per purchase. The total budget has since been nearly 150 billion yuan ($21 billion), helping to create a competitive electric vehicle ecosystem.

As a result, sales have increased fivefold, from 1.37 million NEVs (including electric vehicles and hybrids) in 2020 to 6.89 million in 2022. But by 2022, the government had cut subsidies by 30% and eventually eliminated them completely by the end of this year. So to maintain sales in 2023, manufacturers had to compete to reduce prices, with Tesla starting the year.

Thanks to launching a price reduction race in the Chinese market, Tesla's sales in 2023 reached 1.8 million units. Meanwhile, BYD's sales grew by 61.9% last year, reaching 3.02 million units, including 1.6 million electric vehicles and 1.4 million hybrid vehicles.

Susannah Streeter, head of currencies and markets at Hargreaves Lansdown, said the price cuts had been a sales boost for BYD. “A price war would hurt both companies’ margins, but BYD clearly believes it is a price worth paying to increase market share and recognition,” she said.

In addition to discounts, BYD also launched a bonus policy for 3,400 dealers in China. SourceReuterssaid it would pay dealers 666 yuan ($93.17) per car if sales targets were met. In total, BYD is estimated to pay up to 2 billion yuan (more than $280 million) this year.

Autos are a capital-intensive industry, meaning they rely on volume to make a profit. For gasoline cars, multinational manufacturers need to sell 200,000 units a year in China to make a profit, compared with 300,000 for domestic manufacturers. But for electric cars, the break-even point is 500,000 because battery costs and technology are not falling quickly.

Only Tesla, BYD, CAC Aion and Li Auto have achieved or come close to this level. So the EV market is unlikely to have room for small-volume but profitable brands like Subaru, Mitsubishi or Mazda in the gasoline sector.

Li Xiang, founder and CEO of Li Auto, believes that only the top five NEV manufacturers in China can survive. According to him, Tesla, BYD and Huawei have already secured their positions. Other companies will have to compete for the remaining two spots.

On December 28, Xiaomi launched its first electric car, aiming to become the world's leading automaker in 15 to 20 years and compete with Tesla. Two days earlier, Huawei launched the Aito M9, which has received more than 60,000 pre-orders.

In the EV industry, the next phase of competition will be focused on smart car systems, which Huawei and Xiaomi are strong in. For smaller manufacturers, partnerships with big tech companies will be the preferred option. But one auto CEO acknowledged that alliances will save companies money but do not guarantee success in the market.

Export exit

Chinese manufacturers are aggressively boosting exports to reduce their dependence on the domestic market, where oversupply and price wars are eroding profits. In the first 11 months of 2023, China exported 4.4 million vehicles, up 58.4% from the same period in 2022, surpassing Japan to become the world's largest auto exporter. According to VAAM, auto exports are expected to increase to 5.5 million units this year.

But the export road has been bumpy. Last year, Russia became the largest importer of Chinese gasoline cars, buying 736,000 made-in-China cars in the first 10 months of the year, four times more than in all of 2022. But the growth was largely driven by Western cars fleeing the conflict in Ukraine.

There will be no similar opportunity in 2024, said Shu Xueming, assistant general manager of Chery Automobile's global unit. Moreover, the Russian auto market is now flooded with Chinese brands, to the point where competition is on par with homegrown brands.

Other markets remain blocked. Chinese electric vehicles have barely made it into the U.S. On Oct. 4, the European Commission opened an investigation into whether manufacturers such as BYD, Zhejiang Geely and SAIC Motor benefited from subsidies to sell their products at prices below cost. France has published a list of electric vehicles eligible for subsidies of up to 7,000 euros ($7,725), excluding most Chinese-made vehicles.

The Chinese brand is also unlikely to make much headway in India, another potentially big growth market Tesla is eyeing, due to border tensions between the two countries, according toReuters.

Sun Xiaohong, secretary general of the automobile department of the China Chamber of Commerce for Import and Export of Machinery and Electronic Products, said that after 2025, China's auto exports may enter a period of stabilization. He said companies should focus on both exports and overseas investment.

Some have. On December 22, BYD announced plans to build a factory in Hungary. SAIC Motor and Nio are also expanding into Europe. Chery Automobile is considering a factory in Mexico, while Great Wall Motor and Chongqing Changan Automobile are also considering setting up operations there.

Phien An(According to Caixin, Reuters)