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Text | Wang Zhi (Secretary-General of Wuhan Automobile Circulation Association)

*This article is a compilation of the author’s speech at the Jiupai News “Jiupai Roundtable” live broadcast on the topic of “The Truth About Car Prices”. It was reviewed and revised by the author before publication.

From last year to July, the automobile price war has been going on for a year and a half. From the earliest Tesla to Wenjie, and then to Dongfeng's fuel vehicles, almost all car companies have participated, and even some luxury car brands (such as Porsche) have entered the game. However, recently, BMW and a number of car companies have withdrawn from the price war. Why do car companies want to fight a price war? What signal does BMW's withdrawal indicate? How long will the price war last? Wang Zhi, Secretary-General of the Wuhan Automobile Circulation Association, was a guest in the "Jiupai Round Table" live broadcast room of Jiupai News and shared his thoughts on the automobile price war.

The following are excerpts from the speech:

Workers work on the production line at the Dadong plant of BMW Brilliance Automotive Co., Ltd. in Shenyang. Photo/Xinhua News Agency

If BMW wants to raise prices, it may kill a lot of people

In the eyes of industry insiders, the automobile price war has been going on for more than a year and a half, and it has been going on for a long time and has intensified. On July 6, 2023, the price war was quite fierce, and everyone realized that the price war would cause some harm to car companies. The China Association of Automobile Manufacturers and 16 car companies jointly signed a letter of commitment to maintain fair market order, including FAW, BAIC, JAC, Dongfeng, etc. The first content is to maintain fair competition order and not disrupt the fair competition order of the market with abnormal prices. But on the second day, the China Association of Automobile Manufacturers issued a statement deleting the clauses related to price descriptions. Price alliances (involving antitrust laws) are not supported by law. A few days later, Tesla announced another price cut.

The price war continued until this year, and BMW announced that it would not participate in the price war, which was a turning point.

I think price war is actually a manifestation of price competition, which is the most common and common way of market competition. In my opinion, price war will not end soon. No matter what the product is, reducing costs and supplying the market in a more competitive way will at least be welcomed by consumers. I believe that price competition will exist for a long time.

From the perspective of anti-unfair competition and anti-monopoly, price competition is protected by law and encourages companies to reduce costs and promote the healthy development of the market.

But now, some car companies are not competing for cost reduction, but for market share by offering prices below cost. This is not particularly benign competition, and will affect companies related to the industrial chain. At an industry conference in Chongqing in June this year, the heads of several car companies complained about the price war, which is becoming increasingly difficult to win. It is relatively benign for car companies to reduce car prices through costs, channels, etc.

BMW's withdrawal from the price war is a tactical retreat. It is positioned as a luxury brand. Although it has maintained temporary sales by reducing prices, it has achieved this by sacrificing profits and brand value. In the long run, it has a very negative impact on the brand's high-end image, and its market share will be further lost in the future. BMW's decision reflects the deep consideration of market trends and long-term brand development by a company with a long history. In addition to price factors, consumers pay more attention to brand tone, future premiums, product quality and service experience.

As a multinational corporate brand, if BMW wants to compete, it may kill a lot of people. Not participating in the price war is to protect its brand power in the luxury car market on the one hand, and to maintain the stability of its dealer channels and the profit per vehicle on the other.

A large part of the sales channels for electric vehicles are direct sales. This type of channel operation has high costs and is slow to build. Tesla first entered China around 2012, and its sales really exploded around the time of the epidemic. It has always insisted on the direct sales model, and the channel establishment was relatively slow. Now, new power brands are not only adopting the direct sales model, but are also switching to the dealer or agency model, which can reduce the channel construction costs of brand car companies.

However, the dealer 4S store model can be quickly built up by utilizing the dealer's previous resources. As sales increase, your bicycle cost can also be greatly reduced.

BMW Group announced that it will continue to deepen its presence in China and increase investment by RMB 20 billion for large-scale upgrades and technological innovations at the BMW Brilliance Dadong plant. Photo/Xinhua News Agency

It is better to participate in price wars even at a loss, so that you can survive

Our current production capacity is far greater than our sales volume. To survive in the long term, companies have no choice but to fight for a larger market share and participate in price wars. Many car companies participate in price wars passively.

What about the product quality of those car companies that are engaged in price wars? We also collect some data related to quality from consumer complaints locally. The greater the sales volume and the more channels there are, the more complaints there will be about the market.

Whether it is a fuel vehicle or an electric vehicle, during the driving process, the final product quality is based on safety. Safety service is the first priority, followed by other services.

In my opinion, the overall market profit level is much worse than before. The unit price of sales has dropped, and car sales have to meet sales targets. In order to speed up cash flow or get year-end or half-year rebates, a large number of dealers will increase overall market sales, but there may be no profit. The overall domestic car sales market has not made much breakthrough and has not yet reached 30 million vehicles.

To compete for market share, price competition is the easiest way. Upstream parts suppliers are under great pressure now. In order to match the production capacity of car companies, they need to invest in designs that are greater than or equal to the production capacity. Different industries also compete at different ports of the upstream supply chain, such as chips, batteries, plastics, stamping, and steel. They will also sacrifice prices, credit terms, etc., and the overall profit level will be reduced.

In the past few years, the advantages of electric vehicles are very obvious, mainly reflected in the use of links, such as the price of refueling and charging. Although the electricity price has risen in some places, the electricity cost of charging is still cheaper than refueling. The maintenance of electric vehicles is not like that of fuel vehicles. It has some actual expenses for regular maintenance, such as changing the engine oil; new energy vehicles enjoy many policy benefits, in addition to purchase tax exemptions, there are also various subsidies and so on.

Most of the electric vehicle production lines are newly built. They definitely have advantages in terms of intelligence, and the production cost will be lower than that of fuel vehicles.

Some car companies are unwilling to participate in price cuts, but in order to maintain the operation of the car companies, including the survival of dealers and suppliers, they would rather participate even if they suffer losses. Only by participating in the competition can they have a chance to survive. However, despite the price cuts and concessions, safety and quality must not be compromised. The bottom line of the law must be adhered to. Now the market environment forces them to make concessions, and they can use their own product advantages to compete.

The supply of vehicles now exceeds the demand. Consumers may not be willing to buy at a lower price, but in the market segment, competition is very fierce, and some brands or models may stand out. From a broad perspective, price wars also have certain benefits, eliminating those companies that are unwilling or unable to innovate technology, improve management level, and ensure product quality, and eliminate some companies with weak financial strength and small market share. However, at a certain level, some start-ups may be under great pressure in the price war because their market share and financial reserves are relatively weak in the early stage. Price wars are just one of the ways of competition. By constantly updating and iterating products and adapting to the market, it has developed to this day and has brought opportunities to companies that are strong and willing to participate in diversified competition.

Due to the price war, the price of automobile products is relatively low, and the quality and technology are constantly improving. Battery technology and intelligence have improved a lot compared with the early years. The national and local governments also have subsidy policies to support automobile consumption. Therefore, I think now is a good time for consumers to buy cars.

[Source: Jiupai News]