2024-08-15
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Author: Li Geng
Header Image丨Visual China
China's auto industry is too competitive. Will the price war continue?
Data from the Enterprise Statistics of Cui Shudong, Secretary General of the China Passenger Car Association
Starting from the beginning of 2023, a new round of "price war" in China's auto market suddenly broke out, and the intensity continues to intensify.
From independent car companies to joint ventures, they have been constantly introducing price reduction measures through "direct price cuts" of existing models or "symbolic launches of new models" in order to gain a higher market share or "maintain" their own sales.
Data from: Dasouche
Compared with the various messy "guide prices" and actual sales prices, the changing trend of the "second-network discount rate" ("second-network" refers to non-brand authorized dealers, the former obtains vehicles through first-network dealers or other channels, and then sells them.) can better reflect the true intensity of the price war.
According to statistics from the domestic new automobile retail platform "Dasouche", the "second-network discount rate" in the Chinese market exceeded 19% in June this year, and the traditional energy vehicle model was as high as 24%, far higher than the normal level of about 10% before 2019.
Substantial and continuous "discounts" have allowed domestic sales to stop falling and rise against the backdrop of a deteriorating environment in 2023-2024. According to the China Passenger Car Association, the cumulative production of narrow passenger cars in China from January to May this year was 11.59 million units, a year-on-year increase of 5.3%; the cumulative wholesale sales were 11.75 million units, a year-on-year increase of 6.1%.
The increase in sales also brought about an increase in industry revenue and profits. According to official data from the National Bureau of Statistics, from January to May, China's automobile manufacturing industry had a revenue of 3.90 trillion yuan, up 6.8% year-on-year, and a total profit of 204.7 billion yuan, up 17.9% year-on-year.
Data source: National Bureau of Statistics
But if we put aside the absolute value and put it into the perspective of industry profit margin, the "difficulties" of the entire industry are obvious - the overall profit level of China's automobile manufacturing industry has been declining since 2016. Even in 2023 when social operations are fully restored to normal, the total profit of the entire industry has declined, and the profit margin has dropped to a new historical low of only 5%.
Data source: Company public data; Note: The top ten include two unlisted companies, FAW and Chery, and some revenue and profits are estimated values
Specifically at the corporate level, taking the automobile companies that take the lion's share of profits in the industry as an example, China's top ten automobile companies only made less than 200 billion yuan in profits in 2023 with sales of 23.15 million (FAW and Chery are not listed, so the corresponding profits are estimates), which is equivalent to a net profit margin of just over 4% (except Ideal).
In comparison, the damage is even greater. Toyota, the world's largest automaker, achieved a net profit of 228 billion yuan with sales of 10.31 million during the same period, which translates into a net profit margin of 11%, about three times that of domestic automakers.
China has clearly taken the lead in the global automobile new energy revolution, so why is the entire industry still so "unprofitable"? What is the root cause of "unprofitability"? Is it really just that domestic automakers are too "competitive"? What is the ultimate goal of the "competitive" Chinese automobile industry? At what stage will it become "uncompetitive"? How should investors continue to adjust their value expectations for the Chinese automobile industry?
This series of questions is very complicated, but the answer can be summarized in one sentence: the eye-catching Chinese auto industry has gone through the easy stage of its rise and is entering a difficult stage of "facing traditional overseas brands at home and abroad, and can only break through and change with 'volume'". This process is destined to be neither easy nor short.
Ordinary consumers may be "overjoyed", but what investors need to do can be summarized as "abstract": avoid blind optimism about Chinese cars in the short term, while maintaining firm confidence in the medium and long-term development.
In other words, only by understanding this key medium- and long-term trend can we make good investment decisions related to China's automobiles.
Why are Chinese cars becoming more and more difficult to run?
Looking back at the development of the global automobile industry over the past 100 years, the automobile industries of three regions have achieved their rise: first Europe, then the United States, and finally Japan. Each rise has its own unique reasons and processes, but compared with these "predecessors", China's automobile industry not only lacks the "right time", but also loses the "right place".
"The right time" refers to whether one can "encounter" the rising period of global automobile demand; "the right place" refers to how much support the local area can provide for the rise of the automobile industry.
Take Japan, which is the closest to the present and has the most reference value, as an example. The reason why its automobile industry achieved a rapid rise in the 1970s, in addition to the two well-known factors of correct technological route and high production efficiency, another equally critical but lesser-known factor was the "explosion" of global automobile market demand in the 1960s.
This global automobile market "resonance" has actually paved the way for the globalization of "new players" in the automobile industry.
Take the United States, for example. Last week, it officially raised tariffs on Chinese new energy vehicles from 25% to 100% and on lithium-ion batteries for electric vehicles from 7.5% to 25%. It suffered severe import shocks from Japanese cars in the 1970s.
Japanese automakers’ sales and market share in the U.S. from 1980 to 2020
In 1970, Japanese cars had a market share of only about 3.7% in the United States. By 1981, Japanese cars, which still did not have a factory in the United States, had achieved sales of 2 million in this market, and their market share soared to 18.6%.
This fierce "offensive" directly caused the sales of the three major American automakers (GM, Ford, and Chrysler, the latter of which has been acquired by Stellantis) to drop by 30% in 1981, and operating losses reached as high as US$6.2 billion. Chrysler, the worst hit, was on the verge of bankruptcy, and more than 100,000 workers in the entire industry were laid off.
Faced with an impact far more serious than China's current imports of new energy vehicles, and based on the fact that the automobile market is still developing rapidly, the US government did not "deal with it" as it did with the semiconductor industry. Instead, through a series of complex diplomatic negotiations in 1981, it prompted the Japanese government to "voluntarily" propose an export policy that seemed restrictive but was actually very loose: for the next three years, the number of Japanese cars exported to the United States would be limited to 1.68 million vehicles per year.
Although this number is less than the 2 million vehicles Japan exported to the United States that year, it is still higher than the export volume in 1979, which is equivalent to limiting the export volume by about 15%. At the same time, the United States also "generously" stipulated that if most of the production links can be completed in the United States, there will be no limit on the number.
The apparent "letting the wolf in" soon led to a number of Japanese car companies (Toyota, Honda, Nissan, Mazda, Mitsubishi, Isuzu andSubaruCompanies such as Toyota, Toyota Motors, and others have begun to build local production capacity in the United States. Toyota, for example, has built five large-scale vehicle and core parts production plants (one of which is in Canada) in 10 years.
Combined with the local production capacity built in Southeast Asia at the same time and later in Europe, Toyota has gradually established 14 major production bases (as of early 2024) and dozens of factories in major automobile consumer markets around the world.
With these newly added overseas production capacities, Toyota not only successfully reduced the proportion of exports to overseas sales to below 50% from 1990 to 1995, but also smoothly completed the transition from "product export scale" to "overseas operation localization", and gradually realized the "globalization of business layout" at the product and brand level based on market share. Ultimately, Toyota became the world's largest automaker and has remained on this throne for a long time.
It took only 45 years for Japan to enter the automotive industry, achieve globalization, and lead global automotive development. This can be described as "smooth sailing."
In contrast, China's automobile industry, which has only been developing for about 40 years in the passenger car field, has finally completed the initial technology accumulation, research and development, and manufacturing capacity building in recent years, and has found another development path under the framework of the new energy revolution. However, it is facing "stagflation" in global automobile demand.
North America and Europe, which once provided key support for Japan's globalization, have basically stagnated in car sales over the past 10 years; the Southern Hemisphere (mainly Africa and South America) has a huge number of car-less people, but its economic strength has never kept up; although other regions in Asia are still growing, there are also "magic markets" such as India.
The "stagnation" of demand not only restricted the export of Chinese automobiles, but also directly affected subsequent globalization, resulting in the rise of China's automobile industry being "restricted" to the domestic market.
Data source: Secretary-General of China Passenger Car Association
China's vehicle exports will reach 5.22 million in 2023, surpassing Japan's vehicle exports in terms of data. The growth is encouraging. However, if we take into account the "overseas production" that goes beyond "vehicle exports", we will see that China's automotive globalization progress still has "huge potential".
In 2023, Japan's automobile production will be 9 million vehicles, and overseas production will be 17.51 million vehicles, accounting for 66% of the total production; Germany's three major automakers (Volkswagen,
In contrast, the Chinese auto industry not only has no official statistics on overseas production figures, but a few automakers with a higher proportion of overseas sales are still stuck in the KD factory (knockdown assembly factory) model. This is not because Chinese automakers are not working hard, but the lack of demand has created huge resistance to overseas expansion.
Take the European Union, which introduced additional tax measures on Chinese electric vehicles in June this year, as an example. From the perspective of the entire region (some countries may have different considerations from the EU), since market demand is no longer growing and automobile supply and demand have long reached a dynamic balance, then if the Chinese automobile industry is still guided to build local production capacity, it will not only fail to increase the total output value of the automobile industry, but on the contrary will squeeze the profit margins of local companies, further causing a terrible situation including bankruptcy and large-scale layoffs.
The "protection" route inspired by the downward trend in demand has led mature automobile markets such as the United States and Europe to tacitly choose to "add" a "one-way valve" against Chinese automobiles in their markets - using various measures including capacity construction approvals and tariffs to restrict the globalization of China's independent automobile industry; only allowing foreign-funded products from overseas automobile industries that take advantage of China's manufacturing advantages (Tesla is wholly owned and is also allowed) to enter the market.
The tax rate adjustment in July is the temporary anti-subsidy tax
The EU held its first round of votes last month, with 12 EU member states in favor, 4 against, and 11 abstentions. The temporary anti-subsidy tax imposed on Chinese pure electric vehicles (for a period of 4 months, and after the formal tax measures are introduced, the policy will be valid for 5 years) officially began on July 5, directly affecting the sales of Chinese cars in Europe in June:
Belgium (Antwerp), the main entry point for Chinese cars in Europe, exported 139,000 vehicles in the first half of this year, a year-on-year increase of 59%, but the export volume in June was only 15,000 vehicles, a month-on-month decrease of nearly 50% and a year-on-year decrease of 27%;
The UK, the largest direct exporter of Chinese cars in Europe, exported 114,000 vehicles in the first half of this year, a year-on-year increase of 69%. In June, the export volume was only 10,000 vehicles, a month-on-month decrease of nearly 60% and a year-on-year decrease of 34%.
The United States on the other side of the Atlantic Ocean is no less aggressive than the European Union in targeting Chinese cars. In addition to the 100% tax rate on Chinese new energy vehicles that just came into effect on August 1 last week, there is a high probability that it will actively intervene in the production and sales of Chinese cars in Mexico.
The simplest way is to impose further special restrictions on the production capacity of Chinese automakers in Mexico, exclude them from the "United States-Mexico-Canada Agreement (USMCA, 75% of the value of goods must be produced entirely in Mexico, including the upstream raw materials)", and block the channel for Chinese cars to enter the United States by bypassing Mexico.
Under the objective conditions and active restrictions of the European, American and Japanese auto markets, the overseas development of domestic auto companies has not been smooth, and they can only focus on the Chinese market. Coincidentally, the potential car consumer population in China (people aged 21 to 50) began to slowly decrease after reaching its peak in 2015, announcing that the domestic auto market is moving towards a "stock market".
Data source: National Bureau of Statistics
Figure from Roland Berger report "Car Crowd Insights and Car Purchase Decision White Paper" 2023
According to relevant statistics from Autohome, the age distribution of China's car-buying population from 2017 to 2022 is concentrated in the 20-50 year old group (easy to understand, they are too young to afford it, and too old to want to drive it themselves). From 2015 to 2024, in just 10 years, the total number of this part of potential consumers has dropped from 723 million to 617 million.
This number will further decline to 577 million by 2030 and to 491 million by 2040. As the number of potential consumers decreases, limited urban living space and road resources continue to create increasing resistance to automobile consumption.
Data source: China Passenger Car Association
The best proof of the weakening of automobile consumption power is the change in sales under the background of "price war". China's passenger car retail sales increased by less than 6% in 2023, and the sales growth in the first half of 2024 was only 3.3%.
Among them, there was a significant year-on-year decline in monthly sales from April to June 2024 (down 5.5% in April, 1.8% in May, and 6.7% in June). From the digital level, it is proved that the "price war" from 2023 to now has not stimulated more market capacity, but has only guided some consumers to "consume in advance."
The total market volume of "overseas + domestic" has not grown. If China does not launch a new energy revolution and does not have the strength to compete with traditional overseas automakers, the Chinese auto industry may usher in a long plateau period.
But now, China's independent automobile enterprises have made significant progress in new energy technology and automobile product strength. Faced with a rare opportunity, Chinese automakers cannot choose to let it go, so after consolidating their position in the domestic market, independent automobiles have begun to regain the dominance of the domestic market and impact the international market.
The rise of the "reverse demand cycle" inevitably led China's automobile industry to "open the way with volume".
To break the original pattern of "domestic + overseas", we still have to rely on "volume"
Data source: China Passenger Car Association
Taking the domestic market as an example, from January to May this year, the sales share of domestic automakers has rapidly increased to 56.1%, an increase of more than 8% year-on-year. In contrast, the market share of Japanese joint ventures fell by 11.7%, and the better German joint ventures also fell by nearly 4%. The American joint ventures suffered the most, with a drop of more than 15%.
Note: Combined with the estimated insurance price, the insurance price is usually not completely consistent with the actual transaction price
Compared with sales volume, the sales and profit ratios are more important to the domestic auto industry. Although the insurance volume of luxury and super luxury cars of domestic automakers in the first half of this year is still lower than that of joint ventures and imports, the sales ratio of the overall market has reached 43%. Considering that the luxury and super luxury markets generally have higher gross profit margins, the profits that can enter the pockets of domestic automakers should be close to 40%.
How to change the BBA (BMW, Mercedes-Benz,
New energy new forces represented by "Weibo, Xiaopeng and Li Auto" adopt the "traditional friendly route", that is, to build a high-end brand and then compete with traditional luxury cars in a similar price range. However, since BBA has too deep a foundation and the establishment of an independent high-end brand requires at least a dozen years of investment, these attempts are still in progress and have not achieved much success.
Data source: Insurance statistics
Taking the sales of the ultra-luxury market of 500,000 as an example, in the first half of 2024, only three domestic brands achieved rapid sales growth:
"Wenjie", which has developed rapidly with the help of Huawei's technology research and development and brand marketing capabilities; "Denza", which has absolutely led in product strength in the pure electric MPV field; and "Yangwang", BYD's first independent ultra-high-end brand created by investing all its technological accumulation.
If we continue along this path, by "wasting time" and "waiting", Chinese automakers will most likely be able to enter the luxury market and compete with BBA. However, Chinese automakers have finally gained advantages in technology and products, and must seize this once-in-a-lifetime "window of opportunity". How can we accelerate the process of "independently controlling sales and profits in the Chinese auto market"?
The answer is actually very simple - first "pull down the pedestal" of the "joint venture + overseas" brands. Since the "cards" in your hand are bad, you should not play according to the existing rules, but find a way to promote the "reshuffle" of the entire market, create space in the high-end market, and then promote the "promotion" of independent luxury and super luxury.
In fact, domestic car companies also do this. Take Wenjie, the domestic brand with the highest sales in the super luxury market above 500,000 yuan (mainly because its price is just over 500,000 yuan). During the marketing process, it was directly called "the best SUV under 10 million yuan" by Yu Chengdong.
This "high quality and low price" competitive route, while rapidly increasing the proportion of domestic sales and sales, inevitably produced two chain reactions: the "dying counterattack" of joint venture automakers and the "crowded competition" of domestic automakers in the mainstream market.
Taking Honda's flagship SUV "Hao Ying" as an example, the "23 240TURBO 2WD Elite Edition" with a guide price of 185,900 yuan is only about 115,000 yuan after the discount (the following quotes are the author's personal offline bargaining results, and may not represent the situation in all regions), with a discount of nearly 40%. Toyota's flagship SUV "
This situation is not limited to SUVs. In the past, Japanese joint venture car companies have clearly led the domestic B-class sedan products and have also joined the ranks of heavily discounted products:AccordThe whole series offers a discount of 70,000 yuan.
BMW, which has long occupied the mainstream luxury segment in China (300,000-500,000 yuan), also offered very "exciting" price discounts in the second quarter of this year. Take the 320 Li, the entry-level model of the 3 Series that is about to be discontinued, for example. The suggested retail price is 321,900 yuan, and with the local car purchase subsidies, the bare car price can even be less than 200,000 yuan.
Data source: Insurance statistics
If the temporary price cuts of joint venture automakers are "closing the fold after the sheep have bolted", the domestic automakers can only say that they are "inevitable" in the mainstream market. Take the data from the first half of this year as an example, the sales volume of domestic automakers in the "50,000 yuan to 200,000 yuan" (calculated according to the guide price, the actual transaction price is lower) has just dropped below 70%. Almost all brands of domestic automakers have carried out a series of product layouts in the "A-B" market segment. It has become normal for 7 or 8 "domestic + joint venture" products to compete with each other under the same consumer demand.
Although the intensity of competition may be higher than expected before the "price war" was launched, this wave of offensive by domestic car companies has still achieved remarkable results. The previously much-talked-about "BMW price increase" is the best example: it has nothing to do with maintaining a high-end image or ensuring profit margins. The essence is that joint venture car companies cannot offer the same price as domestic car companies for products of the same level. In the end, they can only choose to lower sales expectations and exchange the shrinkage of overall sales for "no loss" on each car.
Compared with the domestic market, which has been so "rolled" that the theme has been switched to "ultimate victory", domestic car companies need to "roll" to break through in their journey of globalization and expansion overseas.
China's vehicle export destinations are ranked by quantity. Data source: Secretary-General of China Passenger Car Association
Taking the first half of 2024 as an example, 66% of the newly increased export volume of nearly 600,000 vehicles will be "monopolized" by five countries: Brazil 142,000 vehicles, Russia 107,900 vehicles, the UAE 69,400 vehicles, Mexico 35,900 vehicles, and Kyrgyzstan (most of Kyrgyzstan will be re-exported to Russia, which has tax incentives) 32,400 vehicles.
The total market size of these four countries in 2023 is less than 5 million vehicles, and all of them have production bases of local or overseas automakers. The market share of Chinese automakers' complete vehicle exports to these destinations has exceeded 20%, entering the countdown to "must set up local factories."
In addition to the overall figures, the slow progress of new energy transformation overseas is also a cause for concern. In June this year, China exported a total of 490,000 vehicles, of which only 133,000 were new energy vehicles, accounting for only 27%. This is far lower than the overall new energy penetration rate of 48.5% in the domestic market, and even lower than the new energy penetration rate of 72.5% of domestic automakers.
Developed countries such as Europe and the United States have relatively convenient new energy vehicle infrastructure, but have begun to restrict the sales of Chinese new energy vehicles; a few countries such as Brazil and Thailand, because of their determination and large investment in the transformation of automobile electrification, actively embrace the landing of Chinese automobiles; the remaining countries and regions are still in the "should be educated" stage.
Compared with the domestic market that is already "on the right track", in addition to finding market opportunities to achieve sales overseas, Chinese automobiles also need to enter the market with sufficiently high "comprehensive cost-effectiveness" for plug-in hybrid products that can achieve higher fuel economy and more outstanding power performance in daily use even when fully fueled, so as to create opportunities for follow-up infrastructure and accelerate the rolling of the "snowball" of new energy transformation.
Take Thailand, which has the most radical attitude towards the transformation of automobile electrification, for example. Chinese automobile products are better than Japanese fuel vehicles in terms of appearance, interior luxury, and quality. This has forced Japanese brands to stage a "price war" similar to that in the domestic market, and "add features without reducing prices" for their flagship products such as "Yaris" and "Honda City".
The "two-pronged" approach of "winning" the domestic luxury market and "winning" the overseas market share and the leading position in the new energy transformation has naturally become the only choice for Chinese cars. On this basis, the "window of opportunity" that finally appeared after years of deep cultivation in new energy has finally forced Chinese cars to gradually move towards a "winning to the bottom" competition model.
"Roll to the end" is the most precious time window
If Chinese auto companies want to rise, they can only "subvert" the global auto industry structure, which is equivalent to stealing food from others. Overseas auto companies have responded to the situation and started to "learn from the best" to study, learn, and draw lessons from China's new energy vehicle development path, continuously narrowing the gap in product strength and compressing the "window of opportunity" for Chinese auto companies.
Starting from 2023, overseas automakers, noticing the changes in the Chinese market, have taken the initiative to study Chinese cars, which were once considered "backward". From going directly to the Shanghai Auto Show to measure with a tape measure, to directly buying BYD back to Japan and Europe and the United States to disassemble, the leading multinational automakers have obviously realized the current technological leadership of China's new energy vehicles.
Take the plug-in hybrid technology track as an example. The leading domestic plug-in hybrid products only need to weigh 200 kilograms more than fuel vehicles. Using a "small engine" to install a "small" power battery can achieve an energy consumption level that is more than 30% more fuel-efficient than the Japanese internal combustion engines that have been honed for many years. At the same time, it also has the power performance that only high-performance fuel vehicles had in the past. It is fully capable of launching a new energy revolution in any country in the world.
Earlier this year, Caresoft Global, an American research institute,BYD SeagullThe analysis also concluded that "American car companies have fallen behind China in terms of car manufacturing concepts, electric car manufacturing technology, and production process organization."
Obviously, "leading" has become a label for Chinese cars, but we must be aware that this is only a description of the current situation, not a long-term guarantee. As overseas auto companies gradually wake up and begin to learn from China in the field of new energy vehicle technology and accelerate their catch-up, the "window of opportunity" for the rapid rise of China's auto industry is gradually shrinking.
Take Toyota, which is the fastest and has rich accumulation in hybrid and battery fields, as an example. On the basis of having previously cooperated on several pure electric products, it was reported in May this year that it will also introduce plug-in hybrids, and it is very likely to adopt BYD's DMi technology (super hybrid technology).
While lowering their profile to directly develop the three-electric system with Chinese automakers and directly adopt batteries from Chinese automakers, Japanese automakers have begun to lay out the "next city". As early as the end of last year, Toyota announced that it would join forces with Japan's second largest oil company, Idemitsu Kosan, and invest huge sums of money to "bet" that it would be ahead of China in installing all-solid-state batteries on commercially available pure electric vehicles by 2027-2028.
In addition to working hard on the power system, joint venture models have also begun to pursue intelligence and networking.
With the ever-shrinking gap in technology and products, if domestic automakers want to maintain their past high-speed growth, they can only further control costs and keep their leading "comprehensive cost-effectiveness".
The good news is that because China's automobile industry is relatively "competitive", it has concentrated on completing global investment in the entire industrial chain in the past few years. In particular, its control of global upstream raw resources and the manufacturing scale of each link have far surpassed those of Europe, the United States and Japan, and it has accumulated sufficient cost advantages. It is also less susceptible to overseas "control" at the industrial level.
The bad news is that it is difficult to achieve the ultimate goal in recent years, both domestically and overseas, and Chinese automobiles must fight on two fronts, "domestic + overseas". Most companies in the Chinese automobile industry will most likely have to maintain low profit levels for a longer period of time and continue to obtain more funds from capital pools including the secondary market. Some companies may even be acquired or fall forever.
For the Chinese automobile industry, which has played the role of a "follower" for more than 30 years and has "endured" this round of new energy revolution with great difficulty, it is impossible to return to the original "living under someone else's roof" and the only choice is to continue to "forge ahead courageously."
This determination and our gradual "overtaking" in automotive technology and products will hopefully allow us to gain the lion's share of global automotive market profits in the medium and long term in the most optimistic scenario, and in the most pessimistic scenario, we can use the Chinese market as a base to wait for a new "window of opportunity". Investors must have firm confidence in the medium and long-term development prospects of China's automotive industry.
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