China saw excellent new automobile sales in October thanks to government incentives. However, concerns have been raised about whether government subsidies are simply encouraging consumers to advance purchases, perhaps leading to a cold wave in China's auto market in 2025, according to industry sources.
Government incentives provide short-term boost
Anxieties about an even colder winter next season mainly stem from the fact that the oversupply problem in China's auto market remains unchanged. Considering that many supply chain segments are still operating at a loss, simultaneous aggressive measures such as subsidies and price cuts are only viewed as short-term stimuli. For the supply chain, the returns are limited, and it may not be able to survive future challenges.
Supply chain players pointed out that government incentives have brought a much-needed boost to China's auto market in the fourth quarter of 2024. The "old for new" policy is intended to benefit various industries and stimulate overall economic growth, including the stock market.
Once the economy recovers, there will be an opportunity for the auto industry to get back on track. However, the market is concerned that the NEV sector's price-cutting strategy to stimulate demand will not be sustainable in the long term.
Two highly anticipated game-changers in the auto industry have yet to make an appearance. First is the popularization of solid-state batteries, which would eliminate range anxiety and offer greater safety, allowing NEVs to more effectively replace fuel vehicles. Second is the immaturity of AI technology. The supply chain is still in the exploratory phase, which prevents it from achieving the same transformative effect seen with smartphones replacing traditional mobile phones.
Industry players worry that once subsidies and price reductions are exhausted, gas-powered vehicles may see a resurgence, which would wipe out many struggling NEV manufacturers. Some industry players believe government policies can be used as both carrot and stick. For example, after withdrawing subsidies, it is common for countries to impose taxes on carbon emissions, which can similarly help maintain government support for NEVs.
Record price cuts in 2024
Data compiled by Chinese media shows that from January to September 2024, China's auto market cut prices for 195 vehicle models, surpassing 150 models in 2023 and 95 in 2022. The driving force behind these price cuts is NEVs, whose market share has quickly caught up to fuel vehicles. In mid-2024, new NEVs accounted for half of car sales in China. In the last two months, NEVs have accounted for more than 52%.
In the NEV sector, 29 models of plug-in hybrid electric vehicles (PHEV) lowered their prices by an average of CNY24,000 (US$3,371), a 13.7% decrease; 69 battery electric vehicles (BEV) reduced prices by an average of CNY23,000, a 13.5% decrease. Additionally, 13 models of extended-range hybrid electric vehicles (HEV) and fuel vehicles lowered prices by an average of CNY14,000, a 7.6% decrease, while 13 HEV models reduced prices by CNY15,000 or 8.4% and 71 fuel models reduced prices by CNY15,000, representing 9.3%.
Since NEV prices were higher than those of HEVs and fuel cars to start, sellers are hoping to attract consumers with larger reductions, bringing NEV prices down to that of fuel cars. However, Dong-Shu Cui, secretary-general of the China Passenger Car Association (CPCA) pointed out that current price competition is not about adding features without lowering prices, but directly cutting prices.
The biggest impact is not only on the automakers and component suppliers who have been forced to reduce costs, but also on the dealers who are facing bankruptcy, delisted, and have even seen owners flee. From January to August 2024, the price war in China resulted in a cumulative loss of CNY138 billion in new car retail.
In the first half of the year, only 27.3% of dealerships reported profits, a significant drop from 50% in 2021. However, many dealerships struggled with adjusting to market changes and carrying out an effective mix of gas and electric vehicles, which is seen as one of the main reasons for their downfall.
Article translated by Eifeh Strom
