China: pricing wars say goodbye to fat earnings margins for global automakers image

Just a couple of years ago, back in 2013, the world’s largest single auto market, China was recording double-digit growth across the entire spectrum, with automakers also reaping double-digit profits.

Today, as the country’s economy – the second biggest in the world – has slowed to a pace that is forecasted to be on par with the one seen in the 1990s, the auto industry has dropped its incredible sales figures to a more mature level. Global automakers have had to adjust, lowering prices for the locally sold vehicles as the reduced delivery pace is now jeopardizing the rich profit margins. VW AG, followed by GM and Ford slashed prices of Chinese models in the past month or so, delivering larger discounts for some of their most popular models. “Pricing adjustment is part of what we need to do every day,” commented GM China chief Matt Tsien. “The market is softer than it has been in the past.” Analysts and industry experts say the rather untraditional hefty price cuts – by as much as a fifth in some cases – have underlying hints of the long term prospects faced by automakers involved in the Chinese market. Chinese consumers are also growing weary of paying in some cases double or triple the price of similar models in the US or Europe.

Meanwhile, the automakers are relentless in adding production facilities in China even as the market is not expected to return to its double-digit growth figures as it becomes more mature. The analysts are worried that chronic overcapacity could soon be reached, even as the Chinese market still sees hefty growth in some areas – such as sport utility vehicles and luxury models.

Via Reuters