Price war looms in China
It appears that the heady days of massive profits for carmakers in China may be over as a slew of international car companies slash prices ahead of a looming slowdown in the domestic economy, a move that will inevitably dent the industry’s rich profit margins in that territory.
Traditionally, international carmakers have enjoyed much higher prices for their cars in China than they would be able to achieve in their ‘home’ markets, none more so than the US-based manufacturers. Now, with a slowing of the car sales market in China due to a weakening economy and massive overcapacity of car production, automakers are being forced into slashing prices to maintain market share.
Following moves by Volkswagen last month, which cut prices on some of its more popular models, General Motors and Ford have followed suit.
“Pricing adjustment is part of what we need to do every day,” said GM’s China chief, Matt Tsien. “The market is softer than it has been in the past.”
Chinese consumers now have a wider choice than before and the domestic brands are starting to offer comparable products to those of the international companies, so the general public is refusing to pay double or triple the prices for similar or identical cars from Europe or the States.
GM may be the hardest hit at present, with demand for its largest brands slipping 5.1% for Wuling, 8.5% for Buick and 5.6% for Chevrolet, leaving it 0.4% down for the year. In response, GM cut prices on 40 of its product offerings, with the biggest reduction being on the Chevy Captiva which saw a 20% reduction (US$8687), although this is a somewhat aging model that is due to be refreshed soon.
Ford cut the price of its Explorer model by 8% and its joint venture partner, FAW, began offering discounts, interest-free loans and other sweeteners to boost sales.
Tsien said that GM is aiming to maintain a 10% profit margin as the Chinese market matures and the days of double digit growth fade into distant memory. But the slowdown could exacerbate the growing imbalance between capacity and demand just as capacity additions by automakers come on stream. This could lead to another round of price slashing and, of course, make Tsien’s target of 10% profit hard to achieve.