Price war over electric cars breaks out in China

A cruel price war has broken out in the world’s largest car market.
During one week in March, Volkswagen’s Chinese joint venture cut the prices of its ID.3 electric cars by 18 percent. Changan Automobile, one of China’s state-owned automakers, offered $3,000 in cash rebates, free charging credit and other incentives for its electric vehicles. BYD, the country’s largest electric car maker, unveiled a second round of one-month discounts for some of its older models.
Amid declining car sales, car brands are going to extremes to stay competitive, offering dealerships and deep discounts. Over 40 automakers have discounted electric and gas-powered vehicles in China this year. The discounts have amounted to several hundred dollars for cheaper models, and tens of thousands of dollars for high-end offerings.
“The severity of this cycle of price cuts is something I have never seen,” said Tu Le, a managing director at Beijing consultancy Sino Auto Insights, who has worked in the auto industry in China and the United States for 25 years.
Price competition has unsettled what was a pillar of strength in recent years, even as strict anti-pandemic measures rocked China’s economy and undermined efforts by the ruling Chinese Communist Party to build confidence.
China’s car sales fell 13 percent in the first three months of 2023. Sales of traditional cars plunged, while growth in electric vehicles slowed, according to the China Passenger Car Association.
China’s EV market has grown rapidly since 2020 – sales doubling last year – supported in part by government subsidies. When the program expired in December after 13 years, competition intensified to attract buyers in an already crowded segment of the market.
At the same time, traditional automakers are scrambling to unload their inventory of older cars ahead of the implementation of tougher national emissions standards in July that will make it difficult to sell diesel and gas-powered vehicles.
An already jittery market began to spiral in January when Tesla, the American company that makes electric vehicles in Shanghai, cut prices in China for the second time in three months. Other manufacturers felt pressured to do the same.
This month, Wang Chuanfu, chairman and CEO of BYD, proposed that the government extend the tax exemptions, which reduce the cost of buying electric vehicles, to 2025, rather than letting them expire this year. And China’s Auto Dealers Chamber of Commerce published an article last month calling for a six-month delay in implementing the new emissions standards.
The rise of electric vehicles
The price cuts are not limited to China. Tesla has also lowered prices in the US and Europe, and competitors have followed suit.
But the intensity of competition reflects the reality that China is not only the largest market for electric vehicles, but also the most competitive.
Established domestic automakers and local start-ups, backed by Beijing’s policies that prioritize the growth of so-called new energy vehicles, flooded the sector, lured by a once-in-a-generation opportunity to upend the balance of power in the auto industry. By one measure, there are about 300 domestic EV manufacturers across China.
Didi, China’s leading ride-hailing service, has developed an electric car with BYD exclusively for its drivers. Xiaomi, a smartphone maker, has said it plans to debut an electric car next year. Even Evergrande, the beleaguered property developer, built electric vehicles, although those plans may be in jeopardy due to debt problems.
China is the leading market for electric cars, and more were sold there last year than in the rest of the world combined. Foreign automakers see an urgent need to gain a foothold in China to develop the know-how and production scale needed to compete globally.
Cui Dongshu, secretary-general of the China Passenger Car Association, said the price war “will definitely continue” because of the importance of mass-producing electric cars.
“Eventually, companies with low sales or poor technology will be easily eliminated,” Mr. Cui said.
Car companies and dealers are now pulling out all the stops for customers. Some retailers offer free holidays or bottles of perfume in exchange for test drives, while some eager sales teams are stalking charging stations hoping to lure drivers away from the competition.
Last month, a promotional poster from a Toyota dealership in the southern city of Shenzhen caused a stir online. It announced a free gasoline-powered sedan with the purchase of a bZ4X, the company’s electric sports car. A woman who answered the phone at the dealership said there was currently no such agreement.
Kevin Yang, 29, said he visited a Volkswagen dealership in Chengdu last month to look at their electric vehicles. He was struck by a sense of desperation among the sellers.
The salesman stayed well past the end of the workday to beg him to take a test drive. After Mr. Yang agreed to take the car for a ride, he began receiving daily phone calls from the salesman offering lower prices if he was willing to return to the dealership.
“The rat race is really intense now,” Mr. Yang said.
There are similarities between the frothy electric car market in China and the early days of the smartphone boom, when a new technology product attracted many upstarts to do battle with established foreign brands.
In 2015, there were more than 100 Chinese smartphone manufacturers – a number that has been significantly reduced to four main domestic brands and Apple. Many non-Chinese brands such as Samsung Electronics, once a mobile phone leader in China, barely register.
Zhu Jiangming, chairman and CEO of Chinese electric car maker Leapmotor, said he saw another similarity. He expects electric car prices to fall faster than traditional cars because, like smartphones, electric car manufacturers will benefit as component prices drop and features improve.
It is possible, Mr. Zhu said, that an average to high-end electric vehicle in China could sell for about $7,000 in 10 years. The average price of an electric car in China is already significantly lower than in the rest of the world, around $35,000, compared to $60,000 in Europe and $70,000 in the United States.
William Li, CEO of Nio, one of China’s top electric car companies, said he planned to keep Nio out of the price war, which he called “unhealthy and unsustainable.” For traditional gas-powered automakers, “cutting prices is their last resort to try to secure market share,” he said in a statement.
The fear among some managers is that consumers will get used to waiting for price reductions. The China Automobile Dealers Association said last month that foot traffic to dealerships has picked up after a downturn, but orders have fallen.
Leapmotor and Li Auto tried to reassure potential buyers with a guarantee offer to make up the difference if the company lowered prices or offered cash rebates in the next 90 days.
Mr. Yang, the car dealer in Chengdu, said he expected prices to go even lower.
“I heard there are more discounts coming soon,” he said. “I’m going to wait a bit.”