China auto market price war stokes fears of industry shake-out

An intensifyingautoindustrypricewarinChinahas stokedfearsof a long-anticipatedshake-outin the world’s largest carmarket.

Shares ofChina’s largestautomakers sank Mondayafter Chinese electric-vehicle giant BYD offered fresh discounts across more than a dozen models, and an executive at another car company fretted openly aboutthe country’s deepeningpricewar. BYD’s moves cut the startingpriceof its cheapest model, the battery-powered Seagull hatchback, to 55,800 yuan ($7,765), from nearly $10,000.

The BYDpricecuts, along with other developments, signal apotential tipping point, where weaker players can no longer sustain deepening losses from the downward spiral onprices, said Tu Le, managing director of SinoAutoInsights, an advisory firm.

“This points to a bloodbath later this year,” he said. “This could be the first domino that would finally put pressure on weaker players — startups like Neta and Polestar — that have been teetering.”

On Friday,the chairman of Great Wall Motors, Wei Jianjun,warned thatChina’sautosector was in an unhealthy state, with pricing pressure hammering the bottom lines of car companies and suppliers. He even drew a parallel to Evergrande, the Chinese property developer that was liquidated last year after a major debt crisis.

“Now, Evergrande in theautomobileindustryalready exists, but it has not collapsed,” he told Sina Finance in an interview.

In another sign of stress in themarket, Reuters reported that Chinese commerce regulators are examining a growing phenomenonthat has also strained theindustry:sales of “used cars” that are essentially new carswith zero miles. The tactic is seen as a way forautomakers and dealers to hit aggressive sales targets, a person familiar with the matter told Reuters.

The Hong Kong-listed shares of BYD Co Ltd closed 8.6% lower on Monday, while GeelyAutofell 9.5%. Others, such as Nio9866.HKand Leapmotor9863.HK, closed between 3% and 8.5% lower.

A slew of startup companies have piled intoChina’s carmarketover the past decade, drawn by theburgeoningelectric-vehicle sector.Themarkethas grown crowdedwith cut-throatpricecompetitionandmost companies sustaining heavy losses.

Of the 169automakers operating inChinatoday, more than half have less than 0.1%marketshare, according to data from research firm Jato Dynamics. The crowded field is reminiscent of the U.S.autosector in the early 20th century, when more than 100 companies vied with big players such as Ford, before theindustryconsolidated.

Le said thepricewarhas lasted roughly three years.Car makers once enjoyed a premium for advanced features such as driver-assistance systems that take control of steering and braking in certain situations, but now more have been offering these as part of the stickerprice.

Last week,China’s state planner cautioned that competition in some industries was getting too heated, with some companies even sellingtheir carsbelow cost, disrupting fair competition.

On Friday, Wei, the Great Wall chairman,warnedthe prolongedpricewarwasharming theautomotive supply chain. Some suppliers are at risk of going under because of pressure from car companies to lower theirprices, he said.

“Some products have been reduced from 220,000 yuan to 120,000 yuan in the past few years,” he said, withoutnaming companies. “What kind of industrial products can be reduced by 100,000 yuan and still have quality assurance?”

Still, predictions of consolidation inChina’s carmarkethave gone on for years, but the field has only grown, said Michael Dunne, a consultant who closely follows theChinaautoindustry.

“BYD’spricecuts will driveoutsome of the weaker players,” he said. “But for every casualty here comes a new Xiaomi or Huawei barreling into the arena.”