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Amid the debate over whether to release weekly sales figures, amid the accusations of covering up the truth by removing the car logo after a fire, and amid the screams of the man in red who had his hand pinched when he tried the anti-pinch function of the car door, the automotive industry is paying the price for unbridled internal circulation.

Losses, layoffs, price wars, traffic wars, quality issues...when an avalanche occurs, no snowflake is innocent.

July 27, 2024NIOInnovation and Technology Day was held in Shanghai. In an exclusive interview with the media after the meeting, NIO Chairman Li Bin was fed up with the weekly sales chart released by competitors, and NIO President Qin Lihong called on relevant departments to take action. Later, NIO executive Ma Lin named Li Xiang on Weibo and asked him to "stop".auspiciousExecutive Yang Xueliang reposted his Weibo to express his agreement, while Li Xiang himself responded with a cartoon illustration of "covering one's ears and stealing a bell", implicitly mocking that competitors were unwilling to accept the reality that their sales were inferior to others.

This seems to be a microcosm of the "traffic roll" in the automotive industry in the past two years - the executives of Car Company A expressed their opinions implicitly referring to Car Company B, Car Company B responded with "yin and yang" rhetoric, and other friendly companies took sides, which ultimately attracted public attention to the company and achieved the effect of attracting traffic.

It is not illegal to publish a weekly sales chart, but the anxiety behind this is equivalent to throwing a "bomb" onto the table every week, exposing the true picture of the vicious internal competition in the automotive industry.

Recently, a meeting of the Political Bureau of the CPC Central Committee announced that the industry should strengthen self-discipline and prevent vicious competition. Although the auto industry was not mentioned, companies with high awareness should have understood the spirit of the meeting. After all, everyone is very clear about the harm caused by internal competition.

Automakers’ profits under pressure

The first to be affected is the pressure on the profitability of car companies. Behind the prosperous picture of Chinese brands taking more than 60% of the market share is the current situation of Chinese car manufacturers selling cars at a loss.

Judging from the performance in 2023, China's most profitable automakersBYDLast year, the company had total sales of 3.02 million vehicles, revenue of 602.3 billion yuan, and net profit of 30 billion yuan.

As a comparison,BenzLast year, the company's total sales volume was 1.1689 million vehicles, revenue was 1.21 trillion yuan, and net profit was 114.3 billion yuan.BMWLast year, the company's total sales volume was 1.2134 million vehicles, revenue was 1.21 trillion yuan, and net profit was 144.7 billion yuan.AudiLast year, total sales volume was 1.9 million vehicles, revenue was 550 billion yuan, and net profit was 49.5 billion yuan.TeslaLast year, total sales volume was 1.223 million vehicles, revenue was 701.3 billion yuan, and net profit was 108.7 billion yuan.

The world's most profitableToyotaIts net profit in 2023 is 230.4 billion yuan, which is nearly four times the total net profit of the 24 mainstream listed auto companies in China (65 billion yuan).

The profitability of domestic automakers is significantly different from that of multinational companies. Even BYD, which has a high degree of vertical integration in its supply chain and has achieved near-maximum economies of scale, is still in this situation. More Chinese automakers will only face a more severe environment.

Data from the National Bureau of Statistics show that the current profit margins of the automobile industry from 2017 to 2023 are 7.8%, 7.3%, 6.3%, 6.2%, 6.1%, 5.7% and 5.0% respectively, and the profit margins of the automobile industry are on a downward trend.

According to incomplete statistics from Everbright Securities, in the first four months of this year alone, nearly 40 auto brands and 128 car series announced discounts, subsidies or price cuts. The harm of volume prices is directly reflected in financial data. SAIC Group,Changan Automobile、BAICgroup,GAC GroupNet profits all declined.

Public data shows that in the first quarter of 2024, 13 mainstream listed automakers (BYD, SAIC,Great Wall, Changan, GAC, BAIC,Jiangling, Seres,JAC、Lifan、Seahorse, Zotye, and BAIC BluePark), only BYD, Great Wall, Jiangling, and Seres saw year-on-year growth in net profit.

Although the overall profit of the automobile industry reached 237.7 billion yuan in the first half of this year, Cui Dongshu, secretary-general of the China Passenger Car Association, analyzed that most of it came from exports.

In the first half of 2024, China's automobile exports increased by 30.5% year-on-year to 2.793 million units.

It is not difficult to find that although Chinese brands have strong sales, their brand premium ability is still not comparable to that of overseas brands. And when the price war continues, this situation of increasing revenue but not profits will become increasingly serious.

S&P Global Automotive Research pointed out that as competition in the Chinese market becomes increasingly fierce, Chinese automakers hope to seek more profits through overseas markets. However, as trade barriers in Europe and the United States rise, the internal tension of Chinese automakers in the domestic market may not be released as expected.

To release the tension, the only way is to reduce costs. Under the condition that technological development cannot keep up with the speed of internal circulation, car companies can either choose to reduce costs on personnel or "cut the knife" on hardware.

Optimization has become the main theme of the industry

In fact, the topic of involution has been mentioned many times. For example, at the China Automobile Chongqing Forum two months ago, BYD, Changan,CheryAutomakers such as GAC and Geely expressed support for internal circulation, while others called for healthy development and strengthened supervision.

Before 2022, the topics that car professionals often talked about when they met were job hopping, salary increases and options. Now, the topics that car professionals often talk about when they meet have become optimization, salary cuts and internal competition.

According to incomplete statistics, the number of people affected by the wave of layoffs in the automotive industry in the first quarter of this year alone exceeded 30,000. As the fuel vehicle market shrinks, traditional automakers with fuel vehicles as their main business have to lay off employees; although the sales of new energy automakers are gradually increasing, they are all losing money selling cars and have to rely on layoffs to recover.

Azhe, who has just worked for a Japanese joint venture auto company for three years, did not have time to adjust his mood, but quickly submitted several resumes online. He couldn't live without income as he had just become a father. He said he was actually lucky because he successfully avoided the wave of layoffs last year. Due to the continued decline in sales, the automaker fired about 900 employees in 2023, most of whom were temporary workers. An old employee told him that this was the first time the company had laid off such a large number of employees in its 25 years of existence.

In mid-May this year, an internal notice of a German joint venture car company was exposed. The notice read: "The company is in the last and only window of transformation. We have no choice but to fight to the death. The only way is to unite as one and face death." The company then started personnel optimization, and eventually 565 people with the lowest performance rankings among those whose labor contracts expired were dismissed.

Compared with emerging companies, traditional car companies are more "ethical" when optimizing. Just after the May Day holiday this year, a new power company started personnel optimization on the grounds of "reducing costs and increasing efficiency", involving more than 5,600 employees, with a compensation standard of "N+1". Interestingly, just one month later, the company began to recall some laid-off employees in key positions, but employees who returned to their posts needed to return the compensation.

Frontline employees no longer have the good life they used to have under the involution. For example, a certain large company has an 896 work system; another large company sent an internal email saying "Saturday is a carnival day for workers"; another large company counts employees as clocking in at 17:00 in the afternoon, no matter how late they work overtime, and does not give overtime pay.

There are even various advanced HR classes circulating on the Internet, teaching HRs from major companies how to PUA their employees. Topics include "How to unilaterally reduce employee salaries?" and "How to avoid legal risks of overtime when working 6 days a week and 8 hours a day?"

The entire industry chain feels the chill

Not only car companies, but the entire industry chain has felt the chill.

Since May, another wave of layoffs has swept through foreign auto parts giants such as Bosch, ZF, and Continental. Chinese auto parts companies are also having a hard time because customers' payment cycles are getting longer and longer. The price reduction negotiations that the OEMs used to conduct once a year have now become "quarterly reductions", "monthly reductions" or even "weekly reductions". Compared with the mental attack of the sales "weekly chart", this is a real physical blow.

The long payment cycle is one of the "straws" that weigh on suppliers, and it can even be said to be an "iron plate". Many people in the supply chain revealed that the common phenomenon now is that the payment cycle has been extended from 3 months to 1 year. For example, when the payment is due, the customer does not pay in cash but instead issues a 6-month corporate acceptance bill, which undoubtedly adds half a year of financial expenses to the company.

When the parts industry was profitable, the company was still able to turn over funds, but in the internal circulation environment, many suppliers were dragged down by the payment period.

The main customers of the auto parts company where Lao Xiao works are two joint ventures. As the sales of joint venture automakers have been declining and customer orders have decreased, the company has been in a loss-making state since the beginning of this year. From August this year, some of the company's workshops will officially stop production and layoffs will be started at the same time. The number of employees in the company is expected to be reduced from more than 300 to about 200.

The company plans to change its focus and apply for project orders from independent car companies, but the current price war in the industry is too outrageous. If they want to get new project orders, they must lead downstream suppliers to lower their bids, which makes it difficult for them to make a profit and even more difficult to survive.

Like the front-line employees of car companies, when suppliers are faced with the rhetoric of "if you don't do it, there are others who will", they often choose to grit their teeth and persevere. After all, working at a loss and still having cash flow is better than having no work.

However, in the price war, "cutting corners" is almost an inevitable option. Several parts suppliers revealed that generally, corporate standards are better than national standards, but at present, in order to reduce costs, the standards can only be lowered again and again. "National standards generally lag behind technological development. They are the lowest bottom line of quality standards." said an employee of a parts supplier.

For example, the national standard requires that the heat resistance temperature of some automotive wiring harnesses is 105°C, but as the number of power appliances in the car increases, the computing power requirements are also higher, and the number of components that generate heat in the car becomes more. Therefore, more reliable suppliers will make the heat resistance temperature above 150°C, but after disassembling the products of their peers, they found that some only reached 135°C, and some only reached 105°C in accordance with the national standard.

In fact, with the first-mover advantage of the smart electric wave, Chinese parts suppliers could have grown bigger and stronger in fields related to smart electric vehicles, such as smart antennas and thermal management systems. However, from car companies to upstream suppliers, the cost squeeze from one level to another has made them lose the motivation to innovate. In the long run, this is tantamount to erasing the opportunity for Chinese suppliers to become international giants.

Dealers' loss ratio is getting higher and higher

As the last link in the flow of cars to the market, car dealers were originally a buffer zone between car companies and the market, acting as a reservoir, but now they may become victims of price wars and manufacturers' KPIs.

China Grand Auto, a major domestic dealer, stopped trading on July 18. As of the close of July 17, the share price of China Grand Auto was 0.78 yuan per share, down more than 95% from its high of 15.75 yuan per share in 2015. At its peak, China Grand Auto's dealerships covered 28 provinces, autonomous regions and municipalities across the country, with a total of 735 outlets. In the first quarter of this year, China Grand Auto's operating income fell 11.49% year-on-year to 27.79 billion yuan; its net profit was 70.9405 million yuan, down 86.61% year-on-year.

Guanghui Auto's situation is a microcosm of auto dealers in the involutionary market. From the news of the bankruptcy of Zhejiang Zhongtong Group in 2023, all 19 of its 4S stores were closed, to the delisting of Pangda Group in the middle of the year, to the severe crisis of Guangdong Yongao Investment Group Co., Ltd. in early 2024, many of its 4S stores were suspended. Even the former easy money makers have been forced to close down.PorscheDealers also collectively forced the OEMs to step down.

The era of "recovering investment within one year of opening a store" has come to an end. Now about 70% of dealers are losing money. The industry leader Zhongsheng Group's net profit in 2023 fell by 24.7% year-on-year, and the profits of auto dealers such as Yongda Automobile, Baideli Holdings, Meidong Automobile, and Xinfengtai Group fell by more than 60% year-on-year.

According to the China Association of Automobile Manufacturers, the inventory warning index of Chinese auto dealers was 62.3% in June 2024, up 8.3 percentage points year-on-year and 4.1 percentage points month-on-month. In order to eliminate inventory, dealers can only sell cars at a lower price.

In the past year, the All-China Federation of Industry and Commerce Automobile Dealers Chamber of Commerce conducted a survey on price inversion and rebate issues on 27 brands. They found that in 2023, the average price inversion ratio of all surveyed brands with the most serious price inversion was 23.05%, and this figure rose to 26.26% in the first quarter of 2024. According to Xing Haitao, Secretary-General of the All-China Federation of Industry and Commerce Automobile Dealers Chamber of Commerce, the most extreme price inversion ratio is even higher than 50%, and million-yuan cars can only be sold at half the price.

Industry insiders have analyzed that there are differences between OEMs and dealers in their understanding of short-term profits and long-term brand development. Traditional automakers rely heavily on dealers to achieve sales targets. When sales targets are too high and market demand is sluggish, some dealers would rather sell goods at low prices to get rebates and subsidies, resulting in a collapse in the terminal price system of some auto brands. Manufacturers do not want to see their own brand premium ability weakened, which leads to contradictions.

On the other hand, as major automakers expand their new energy business, they will set monthly KPIs for dealers to sell new energy vehicles, otherwise they will not receive rebates. However, the cost of after-sales maintenance for new energy vehicles is far less than that for fuel vehicles, which has led to a significant reduction in the after-sales link that originally supported a large part of the 4S store's revenue.

Is transformation possible? "Subject to the manufacturer's business policies and relevant regulations, there are regulations on the number of products, sales, and consultants, and there are requirements for the number of each position. How can we transform?" a dealer explained.

At present, some high-profit automakers that are able to provide a guarantee for dealers have begun to adjust their strategies. While BBA has expressed its intention to withdraw from the price war, Chinese brands that are not profitable are still in price purgatory. Last week, a buyerEquation Leopard 5The consumer who bought the car just one day learned on the second day that the price of this model had been reduced by 50,000 yuan. Now, he is preparing to initiate rights protection.

In the price war, users being treated as "leeks" is not the most serious problem. As the standards of parts and components decline, automobile quality problems also bury hidden dangers. According to data from the "Auto Quality Network", the annual average "complaint-to-sales ratio" of automobile quality problems in 2023 was 34.3 per 10,000, a record high in the past five years, reflecting the deterioration of domestic automobile quality performance.

From OEMs to suppliers, from dealers to consumers, the harm of internal circulation is transmitted layer by layer, forming a closed loop.

China's auto industry urgently needs a way out of the closed loopwarrior。