Price war puts China’s auto industry in reverse, weak demand stalls profits | World News
 "Cars")
Representational image. Photo: Shutterstock
Car dealerships in China are grappling with substantial financial losses amounting to over 138 billion yuan ($19.6 billion) due to an ongoing price war and sluggish consumer demand, reported Hong Kong-daily South China Morning Post, citing data from the China Automobile Dealers Association (CADA).
The association highlighted that these losses have created severe cash flow issues for dealerships, who are struggling to sell large inventories of unsold vehicles. The situation has become dire for many dealers, making their survival increasingly challenging, CADA reported on Monday.
Dealers forced to sell at a loss
According to the report, the ongoing price war has exacerbated the issue, with dealers now selling vehicles at a loss. “The more vehicles dealers sell, the more their losses increase,” the association said.
The association also noted that dealers are struggling to meet their financial commitments, and the time they have to maintain working capital has been severely constrained.
Price war in China’s auto industry intensifies
China’s automotive sector has been engaged in fierce price competition since January 2023, when Tesla introduced major discounts on its electric vehicles for the second time. In response, several domestic car manufacturers, including Xpeng and BYD, which is backed by Warren Buffett, have also cut prices multiple times to remain competitive, the report said.
It added that this intensified competition has driven dealers’ profit margins down to as low as negative 22.8 per cent between January and August, a sharp decline of 10.7 percentage points compared to the same period last year. The overall discount on new cars stood at 17.4 per cent in August.
Impact on automotive dealerships in China
The ongoing price war has already caused the collapse of several prominent dealerships. China Grand Automotive Service, the country’s second-largest car dealer with more than 730 outlets nationwide, was delisted from the Shanghai Stock Exchange in August after its stock remained below par value for 20 consecutive days.
Similarly, Pang Da Automobile Trade became the first dealership to go bankrupt in June 2023.
CADA pointed out that these failures were largely due to liquidity problems across the industry, rather than specific operational issues at the dealerships. The collapse of the financial chain led to these closures, the association noted.
Call for financial assistance
In response to these challenges, CADA has submitted a report to unspecified authorities, seeking financial aid to alleviate the strain on the industry. The association urged government action to address the difficulties faced by dealerships.
The report indicated that the combination of weak consumer demand and pressure from wholesalers has led to inflated inventories. This has forced dealerships to sell vehicles at significantly reduced prices in order to lower borrowing costs and ease financial burdens.
Future of China’s car market
The report commented that China’s car market has entered a new stage of competition, where survival will be key. Since the car dealership industry is heavily reliant on capital and primarily consists of private enterprises, CADA emphasised the need for enhanced financial support to help dealerships navigate these challenges. It suggested that greater financial assistance would stimulate car sales and support the overall growth of the industry.
First Published: Sep 24 2024 | 12:43 PM IST
