Welcome to Chuanqi website!

PRESSROOM
Hot News
Company news
  Home > PRESSROOM > Hot News
Why global brands are cutting China prices

SHANGHAI -- In this market, price wars are normally started by Chinese automakers trying to compensate for a weak brand image and obsolete technology.

But nothing is normal in China anymore. This time it's global brands -- not the domestics -- that are launching a price war.

General Motors and Volkswagen AG -- the two biggest foreign automakers in China -- have cut prices to ease dealer inventories and reinvigorate flagging sales. Those two companies alone control 30 percent of the country's passenger vehicle market.

On April 12, Volkswagen's two joint ventures -- Shanghai Volkswagen and FAW Volkswagen -- cut prices on their entire VW brand lineup by 5,000 to 10,000 yuan ($800 to $1,600).

General Motors went even further. This week, Shanghai General Motors Co. reduced prices of 40 Buick, Chevrolet and Cadillac models by 10,000 to 53,900 yuan.

Flagging sales
The price cuts come at a time when the entire market appears to be losing steam.

In April, light vehicle sales in China rose just 3.7 percent, significantly weaker than the industry's 9 percent increase in the first three months.

In response, other global brands are starting to allow dealers to offer steep discounts. For example, Ford dealerships now offer a 12 percent discount on the EcoSport subcompact SUV. 

Until now, sweeping price cuts by global automakers was unheard of. In truth, they had little choice.

Last month, Shanghai GM's sales dropped 7 percent year on year and VW brand deliveries dropped 7.5 percent.

Toyota and Honda bucked the trend: Toyota's sales rose 8 percent and Honda's 12 percent. But Nissan sales in April fell 19 percent.

Even the luxury market, which once seemed immune to the slowdown, is showing signs of weakness. Last month, Audi sales edged up 0.2 percent, while BMW deliveries rose only 0.6 percent. Only Mercedes showed strength, with sales up 21 percent.

Angry dealers
Why have the global brands run out of steam? Two factors -- angry dealers and newly competitive Chinese automakers -- played a big role, according to Zhu Bin, LMC Automotive's forecasting manager for China.

First, global automakers have reduced inventories and lowered sales targets to appease angry dealers. In the past, foreign brands often propped up sales by dumping abnormally high inventories on their dealers. Burdened with growing losses, many dealers threatened to stop ordering new cars.

With the backing of the China Automobile Dealers Association, dealers demanded lower sales targets and compensation for their losses.

It appears that global automakers kept their promises. According to the dealers association, inventories of foreign vehicles built in China dropped to 45 days in March, from 50 days in February.

Even as foreign automakers adopted more conservative market strategies, Chinese automakers began to gain market share with a new generation of inexpensive compact SUVs.

Domestic Chinese brands sold roughly 238,000 SUVs in April, a jump of 91 percent from a year earlier. Those robust sales helped Chinese automakers to grab 41 percent of the market, up nearly 4 percentage points from a year earlier.

Most of those SUVs were priced from 70,000 to 110,000 yuan. That's about the same price range as compact foreign sedans, but car buyers were lured by the SUVs' dynamic styling and high seating positions, Zhu said.

"Say a customer wants to buy a car with 80,000 yuan. In the past, he would choose a VW Santana, but these days he may well buy a compact SUV developed by a domestic brand," Zhu noted.

Slowing economy
Now a third factor has come into play -- China's economy is losing momentum. According to government data, the economy grew 7 percent in the first three months, down from 7.4 percent in 2014.

But the government's growth estimate may be too rosy, says Jochen Siebert, head of JSC Automotive, a market consultancy with offices in Shanghai and Stuttgart.

Citing steep drops in railway freight transportation and electric power consumption, Siebert argues that the Chinese economy may be significantly weaker.

If so, consumer demand for passenger vehicles -- especially luxury cars -- inevitably will decline. "Statistics indicate economic growth and premium brand vehicle sales are highly correlated," Siebert said.

Siebert expects more foreign automakers will join the price war that GM and VW have started. Further, that price war may spread into China's luxury market.

There are only two ways that automakers can respond: by cutting prices or slashing production. Siebert's conclusion: "Cutting vehicle prices is normally the first step."

  向上