Price War in China: BYD cuts prices despite government calls
China’s automotive industry has been waiting for nearly two years for the price war to burn itself out. But it hasn’t happened, and automakers show no signs of letting up. Faced with falling sales, BYD is implementing significant price cuts, as are its key competitors Geely and Chery.
The call to end the war didn’t work
Nearly a year has passed since Chinese authorities met with executives from over a dozen automakers and urged them to stop the price war before it turned into a race to the bottom. The country’s market regulator called for efforts to “comprehensively rectify ‘involutionary’ competition,” using a phrase that Premier Li Qiang employed to describe the industry’s increasingly self-destructive behavior.
Little seems to have changed. Bloomberg data shows that the average price reduction on BYD models rose to 10% in March. Meanwhile, Geely and Chery are offering discounts of around 15%, although these figures have remained relatively stable over the past twelve months.
China lacks car buyers
At the heart of the problem is overcapacity in China’s automotive sector. Last year, the country sold approximately 23 million new cars, but its auto plants have the capacity to produce 55.5 million cars per year. This has prompted many local brands to ramp up vehicle exports. Last month, exports of electric vehicles from China more than doubled.
Pressure on suppliers and financial consequences
Now, facing increased regulatory scrutiny, companies including BYD are being forced to pay suppliers much faster than before. Before local authorities intervened, automakers delayed payments for months, allowing them to offer deep discounts to boost sales. Now bills must be paid faster, increasing liabilities on automakers’ balance sheets. For BYD, this pushed its debt-to-equity ratio to 25%.
“It seems good for customers, but it’s not — manufacturers are losing money. It harms the entire system,” said François Roudier, Secretary General of the International Organization of Motor Vehicle Manufacturers.
The situation in China’s automotive market remains tense. Despite calls from authorities, the price war continues, and giants like BYD keep cutting prices to maintain market share. This puts significant financial pressure on the entire industry, forcing manufacturers to seek new ways to survive, including ramping up exports. However, tightening regulations on supplier payments adds further difficulties, which could lead to further market consolidation and the disappearance of weaker players. In the long term, such ‘involutionary’ competition, while beneficial to consumers in the short term, risks undermining the financial stability of manufacturers and product quality, which could have negative consequences for the entire global electric vehicle market.