A glut of cars on the market will spark a price war between manufacturers as demand fails to keep up with supply, according to market watchers.
UBS has estimated that global car production will outpace sales by 6% this year, leaving a surplus of five million vehicles that will require a price cut to change.
A crowded order book for most carmakers means prices are likely to remain high in the first half of the year, analysts at the bank said.
Slow economic growth and higher costs of living will then suppress potential buyers’ ability to afford new cars, which will likely hit prices as cars go unsold. Carmakers have already started to cut prices on electric vehicles (EVs) as rising energy costs and expensive upfront costs for the models mean they are becoming increasingly unaffordable.
In January, Elon Musk’s Tesla cut the prices of its cars by up to £8,000 in the UK, putting some of its cheaper models on par with brands such as Skoda and Kia.
Meanwhile, the price of second-hand electric cars is also falling, with the average price of a used electric vehicle down 13 per cent over the past year to £33,060, according to AutoTrader.
UBS said this trend is now likely to shift to petrol and diesel cars as demand declines.
Analysts led by Patrick Hummel said in a note to clients: “Given rising production schedules, we see a high risk of overproduction and increasing pricing pressure as a result. The price war has already begun to unfold in the EV space and we expect it to spill over into the internal combustion engine segment.”
Luxury carmakers, which are generally more resilient during economic downturns than their mass-market rivals, will be less affected and family car makers are likely to suffer, analysts said.
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Overproduction has long been a drag on car companies
Companies typically set production targets, not sales, and then expect dealers to re-sell the cars they’ve made. Excess inventory means steep price cuts, which is good for consumers as cars become more affordable.
However, demand has surged during the pandemic as households have opted to drive rather than use public transport, while lockdowns and staff shortages have caused production to collapse.
This led to record profits for car companies as they were able to charge more for their cars. The owner of Toyota, Volkswagen, BMW, Mercedes and Vauxhall Stellantis posted record profits in 2021 and maintains high returns in 2022. Renault went from a loss of 8 billion euros in 2020 to a profit of 9 billion euros in 2021 .
But as component supply slowly normalizes, they are all scrambling to retain market share in the face of increased competition from Chinese automakers.
Up to 30 new electric vehicle brands, most of them Chinese, are eyeing the UK car market, according to an industry report seen by The Telegraph. Contenders have designs at the cheaper end of the market, preparing to sell mass-market battery cars in the UK.
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The price war has already begun for internal combustion cars in China
Price war started by Tesla Inc. of Elon Musk, has spread beyond electric cars to gasoline-fueled vehicles in China, as companies such as Peugeot SA’s Citroen, Mercedes-Benz Group AG and General Motors Co’s Chevrolet. seeking to protect their market share.
Government subsidies in central China’s Hubei province, along with rebates from state-backed Dongfeng Motor Group Co., have slashed the prices of some cars like the Citroen C6 by more than 40 percent, with bid “sweeteners” as high as 90,000 yuan ($12,900 ) per offer. The promotion will continue until the end of April, according to the announcements of car dealerships. But some market observers believe that this will most likely carry over into the coming months.
A recent spate of price cuts in China’s auto market could further erode profitability for automakers already struggling with slowing demand, analysts warned.
“The developing ce
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a new auto market war in China … is likely to continue into the second quarter and erode profitability across the entire auto value chain in 2023, analysts at Fitch Ratings said in a report.
The sharp price cuts are the result of lower car sales and a rush by automakers to clear inventories as new national emissions standards are due to take effect in July, analysts at Nomura Holdings said in a report on Tuesday. They also expect the price war to last several months.
The latest move was made by SAIC Volkswagen Automotive, the joint venture between China’s SAIC Motor and Volkswagen, which announced discounts of between 15,000 yuan ($2,182) and 50,000 yuan until April 30 on a range of models.
FAW-Volkswagen Automobile, the German automaker’s other joint venture – with China FAW Group – launched an exchange program last week for Volkswagen owners who buy a new gasoline-powered Tavendor or Talagon SUV.
Price reduction is not the only “trick up the sleeves” of car manufacturers. A number of companies, including Li Auto, Lynk & Co., Hozon New Energy Automobile and Zhejiang Leapmotor Technology, this week began offering a 90-day price match guarantee for new purchases made before the end of March or the end of April.
While many automakers said the promotions were only limited-time offers, Fitch analysts said they believed Chinese consumers would hold off on purchases in anticipation of even steeper price cuts.
An official at Leapmotor told Caixin that while the brand has seen an increase in customers visiting its dealerships, some are taking a wait-and-see approach as they believe there could be more price cuts.
Electric vehicle maker Tesla kicked off the price war at the start of the year by offering some big discounts on several models. A number of domestic and foreign EV makers such as Xpeng and BYD soon joined before price-cutting fever spread to conventionally powered vehicle makers such as state-owned Dongfeng Motor Group in early March.
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Car sales collapsed after a popular tax cut on car purchases expired at the end of last year. In the second half of 2022, car sales volume rose 12.4% year-on-year, but contracted 19.8% in the first two months of this year, Nomura analysts said, citing data from China Passenger Car Association. The contraction came even as China lifted strict pandemic controls and economic activity largely returned to normal, they said.
The current price cuts are reminiscent of the relentless discounts dealers offered in the second quarter of 2019, ahead of the previous round of improvements to emissions standards that took effect in the middle of that year, Fitch analysts said. These discounts also distorted the seasonality of auto sales by encouraging some customers to pull the trigger on purchases they might otherwise have made later.
In addition to helping to reduce inventories, the price cuts are likely to spur a reshuffle in the industry, Huaxi Securities chief auto analyst Cui Yan said in a note on Monday. Cui expects that strong non-joint venture car brands will capture a larger share of the market, accelerating the overall consolidation of the industry.
“The price war could drive out weaker automakers, especially joint ventures,” analysts at Ping An Securities said in a report, citing the exit of foreign brands including Suzuki Motor and Acura from the mainland Chinese market in recent years.
“For brands that are able to survive in the mainland market, such significant price cuts will inevitably affect the pricing of new products. A long-term price war is not a healthy way for companies to compete,” they said.
