news

한어Русский языкEnglishFrançaisIndonesianSanskrit日本語DeutschPortuguêsΕλληνικάespañolItalianoSuomalainenLatina

Low price, the destiny of automobile evolution

Author | Wang Yajun

Cover source | Movie poster of "The Shawshank Redemption"

After 550 days of price war, the car companies that once plunged into the "price reduction vortex" began to have obvious differences in their attitudes.

On July 12, the topic "BMW China will withdraw from the price war" became a hot search on Weibo. BMW China responded that in the second half of the year, BMW will focus on business quality in the domestic market and support dealers to make steady progress.

BMW's main models have been reported to have reduced their prices frequently, but its sales in China still fell 4% year-on-year in the first half of the year. During the period, BMW's global sales increased year-on-year.

The car companies that are still in the battle have been divided into two camps. One camp regards the price war as a scourge: if it continues, the entire industry will decline together; the other camp holds a completely opposite attitude: the industry will get better and stronger as it gets more competitive.

On the last Saturday of May this year, Leapmotor CEO Zhu Jiangming shared his views on price wars in an interview with Snow Leopard Finance: This is an inevitable process of industry development, and only in this way can competitive companies survive. "The mobile phone industry and the home appliance industry have all gone through this process."

But in the midst of a period of rapid industry change, Zhu Jiangming still felt sympathetic. A week later (June 1), he joked at an industry forum: "The most miserable people in the world are the CEOs of Chinese auto companies. They issue monthly reports and weekly reports, and every time they put the CEOs on the spot."

Step on the brake or the accelerator?

On July 13, the day after BMW became a hot topic, at the 2024 China Automobile Forum, Geely Senior Vice President Yang Xueliang mentioned the word "involution" 36 times in a 14-minute speech, an average of once in less than 24 seconds.

He expressed his disapproval of involution with a series of parallel sentences:

• The so-called involution is to launch a simple and crude competition in the free market by competing to lower prices;
• The so-called involution means that under relatively stable market demand, people do not follow rules, ethics, quality and safety, and industry regulations, just for their own market share, disrupting the competition order and making the market environment a mess.
• The so-called involution means low-level competition, no quality growth, and no development with stamina;
• The so-called involution is the simple reproduction that only cares about the present and ignores the long-term, and is repeated over and over again. It only seeks an increase in quantity but not a breakthrough in quality. There is no progress, which is a poison to quench thirst for the industry.

Yang Xueliang said that he is not against price wars, but hopes to put the brakes on the current "simple and crude price war": to fight high-quality price wars, technology wars, quality wars, service wars, brand wars, and moral wars.

At the same forum on the same day, Li Yunfei, general manager of BYD's brand and public relations department, expressed a completely different view: "Chinese cars are getting stronger and better as they become more popular."

This is not the first time the two have clashed.

At the 2024 China Automotive Chongqing Forum more than a month ago, Yang Xueliang said that endless price wars would lead to nowhere. Li Yunfei said that in the context of falling prices for battery raw materials, it would be unethical for electric vehicles not to reduce prices. "Price wars should be fought within one's means. If you can, follow. If you can't, just give up and launch the next product. Competition should be healthy and healthy. Don't get angry or overturn the table."

On the same occasion, Zeng Qinghong, chairman of GAC Group, expressed a more incisive view on the price war.

"What is the purpose of an enterprise? To make a profit." In his view, there is nothing wrong with volume because it is the law of the market and the price, but it must be done rationally; there is nothing wrong with giving up profits, but there is a problem with giving up costs. When talking about the impact of internal volume on the company's operations, he said that GAC has laid off many people, "It is not a solution to continue to volume like this."

He cited the example of Toyota, the world's largest automaker. In fiscal 2023, Toyota's net profit reached 4.94 trillion yen (about 230 billion yuan), a year-on-year increase of 101%, which is three times the combined profit of the top five domestic automakers. "Does it (Toyota) roll up prices?"

Wang Chuanfu continued his long-standing attitude of embracing price wars: volume is the essence of market competition, and there can be prosperity only when there is competition.

In addition to Wang Chuanfu and Zeng Qinghong, industry executives such as Li Shufu and Yu Chengdong also expressed their views on involution in June. The auto companies they manage (BYD, Chery, GAC, Changan, Geely, and Great Wall) will have a total revenue of more than 1.5 trillion yuan in 2023, with a combined market share of more than 36.7%.

Unprecedented price war

The ongoing price war is unprecedented in China's auto industry.

In 2018, the domestic auto market ended 28 years of rapid growth and saw its annual sales decline for the first time. The industry generally believes that this is the beginning of the domestic auto industry entering the inventory era.

During the same period, "involution" gradually became a popular Internet term. In 2020, the term was selected as one of the top ten buzzwords of the year published by the magazine "Yiwenjuezi".

In the era of inventory, the most direct manifestation of the domestic auto market's internal circulation is price competition.

In January 2023, Tesla China announced a price cut of 20,000 to 48,000 yuan for its Model 3 and Model Y, firing the first shot in the price war. Within 90 days, the price war spread from the new energy vehicle market to the fuel vehicle market.

In the first quarter of this year, the battle escalated again. According to statistics from Cui Dongshu, secretary general of the China Passenger Car Association, 67 models saw price cuts from January to March, which is more than 60% of the models that saw price cuts throughout last year.

Among the 15 listed automakers in China, 11 achieved year-on-year sales growth in the first quarter of this year, but four of them saw a year-on-year decline in net profit. In the same period last year, no automaker saw a decline in net profit despite sales growth.

Ouyang Minggao, an academician of the Chinese Academy of Sciences and vice chairman of the China Electric Vehicle 100 Association, said in March this year that China's automobile industry has entered a period of pain in the new energy vehicle revolution and deep transformation of the automobile industry, one of the manifestations of which is the price competition of the whole vehicle. Cui Dongshu also believes that the price war is the core manifestation of the great change from fuel-driven to electric-driven.

In a research report, Huatai Securities judged that a price war that will go down in the history of China's auto market may occur in 2023 and 2024.

However, some organizations have seen the light at the end of the war.

In a research report released in late June, Citigroup predicted that due to falling raw material costs and thin profits of joint venture brands, the domestic new energy vehicle price war will ease from the second half of the year and the scope will be narrowed to a few large manufacturers.

Huachuang Securities said in a recent research report that this price war is in a seasonal rest period, and it is expected that from August to September, the price decline will intensify again as the market enters the peak season. However, judging from the prices of oil and electricity, joint venture prices, and the profitability of car companies and dealers, it may be entering the final stage.

Low prices, the destiny of automobile evolution

In the history of automobile development, every revolution has brought cheaper cars.

In 1885, German engineer Karl Benz designed and built the world's first car. In the nearly 140 years since then, the automotive industry has undergone two industry-changing evolutions.

The first evolution occurred in the United States.

At the beginning, cars were produced through non-standardized hand-made methods, with low output, loud noise and high prices. They were regarded as toys of nouveau riche by the traditional upper classes in Europe and the United States.

In the early 20th century, Henry Ford, the founder of Ford Motor Company, was the first to realize the business opportunities it contained: whoever could make cars of better quality and lower prices would change the way people travel and make huge profits.

How to build such a car? He got inspiration from the assembly line operation in slaughterhouses: a cow is not slaughtered by one worker, but hung on a conveyor belt, and workers cut and deboned it according to the process. Inspired by this, Ford decided to implement a standardized production method, placing parts on the assembly line, and workers with different divisions of labor assembled them into a car in turn.

In April 1913, the world's first automobile production line was launched at Ford's Detroit plant, which eliminated the need for filing and assembling cylinders, making automobile production more efficient and less costly. Ford's Model T was the first car to be produced on the assembly line.

In the second year after the assembly line was launched, the price of Model T dropped to $360, a drop of more than 50% compared to 1910. By 1923, the annual sales of Model T reached 2 million.

A 1905 American newspaper advertisement depicting a $2,500 car described as "the best bargain ever."

The second evolution of the automotive industry took place in Japan.

After World War II, Eiji Toyoda became a director of Toyota. Based on the actual situation of the Japanese market, he proposed the "One Flow" principle, that is, just-in-time production, which means avoiding inventory in each production link and eliminating waste caused by overproduction.

Based on this, Toyota explored the "lean manufacturing" model in the 1950s to further reduce costs and make cars more affordable.

The Toyota Corolla was launched in 1966 with an average price of 432,000 yen. It was a success in the domestic and overseas markets due to its low price. At that time, the average price of Japanese cars was about 1 million yen. In 2000, Corolla became the "best-selling car" in the Guinness World Records with cumulative sales of 25 million units.

These two evolutions benefited from the improvement of production efficiency and manufacturing model respectively, but their common point is that they made cars cheaper.

Today, how far is the automotive industry from its third evolution?

The entire automotive industry is undergoing a transformation towards electrification and intelligence. This transformation has reshaped the structure of the entire vehicle and also brought about a series of cost-reduction technologies such as integrated die-casting and battery-body integration. It is foreseeable that the decline in costs will lead to a trend towards lower car prices.

Chinese automobile industry, which is at the forefront of the transformation, is destined to be the first to bear the impact of the transformation.

McKinsey defines 2019 as the beginning of the elimination round in China's auto industry. The nearly 100-year-old American consulting firm believes that there will be no easy winners in this elimination round.

Will the end of the knockout round be the end of the price war?

Buffett, who is nearly 100 years old, has witnessed two evolutions in the auto industry. Last year, he said at the Berkshire Hathaway annual shareholders meeting that the auto industry was "attractive," but he would no longer invest in automakers because the competition was too fierce and the winner could not always be the winner.

But in this industry where there are no permanent winners, some things never change. Henry Ford wrote in his autobiography: "To produce for consumption means to produce high quality and low price."