New round of car price war sputters
By Wang Yu (China Business Weekly)
Updated: 2004-07-13 10:08

As competition heats up, China's car market set-up is changing. Will the change keep on and is that a boon for consumers?

World major automakers General Motors (GM) outsold Volkswagen's main unit in China for the first time in June after the US carmaker cut prices, a breakthrough, analysts say. The event may rekindle a price war in the world's fastest-growing car market.

"GM's price cutting plays a major role in changing the firm's market place in China. If the situation continues, there is still a possibility for further price cuts from both carmakers in the foreseeable future," Wayne W.J. Xing, publisher and editor-in-chief of China Business Update, said last week.

A model stands next to a General Motors' GL sedan. The US automaker outperformed its German rival Volkswagen's main unit in China for the first time in June after price cut adopted last month.[newsphoto/file]

Shanghai GM, a joint venture between global auto manufacturer General Motors (GM) and the Shanghai Automotive Industry Corporation, sliced last month the price of its two core models in China by up to 11 per cent ahead of a major reduction in import barriers next year.

Instead of chasing instant sales figures, Chen Hong, general manager of Shanghai GM, once said the move is aiming for a more intense price war next year after the auto import quota is eliminated, which indicates GM will not adjust pricing of its major products until 2005.

But analysts do not believe that.

"First Automotive Works Corp once claimed that Mazda's price will remain unchanged in three years. But how about now?" Xing said.

Agreeing with Xing, Xie Wei, an auto analyst with China National Automotive Industry Consulting and Development Corp, commented that there is no reason for consumers to believe either sales agents or car makers.

"They can always figure out excuses for visible or hidden price cuts. They would claim they keep the price unchanged, while adding more equipment and more functions to the vehicle or giving free gifts," Xie said.

That is why Xie also believed that price war would be unavoidable within a year.

"The price war in the low-end is almost finished, which leaves little space for further price cutting. But the medium-end market is different.

"The 'war' has just started, and the trend will continue for at least a year," Xie said.

According to Xie, when the quota for imported vehicles is eliminated and tariffs cut further in 2005, the auto market will be totally different, since much tougher competition will force "auto makers and sales agents" to perfect their products and after-sale services.

"They have to dish out the latest models rather than just flood the local market with outdated ones. And more importantly, automakers will put more efforts to perfect their after-sales services and maintenance. The current situation that some auto parts for some models are extremely expensive will never happen again," Xie said.

By that time, the market will be more developed, and market players will be forced to act in accordance with market-oriented rules, Xie said.

Under those market circumstances, consumers will no doubt benefit, the expert said.

Powerhouses

GM's sales in China, expected to eclipse Germany in new car sales to become its number two market worldwide this year, rose nearly five per cent to 24,040 vehicles in June from May, spokeswoman Daphne Zheng said.

Across town at Volkswagen's Shanghai venture, sales dropped more than 11 per cent to 20,085 cars in June from May, a company executive said, dipping below GM's sales for the first time on a monthly basis.

Besides GM, Japanese car maker Honda's China venture -- Guangzhou Honda Automotive Co Ltd, which is 47.5 per cent held by Hong Kong-listed Denway Motors Ltd, surpassed Volkswagen by selling 21,275 vehicles in June compared with 13,886 in May.

In Xing's eyes, GM gains a robust upward momentum as a rising star. But he also pointed that sales figure of the first half still shows the German automaker outperformed its US counterpart in terms of sales.

"Volkswagen is late in terms of launching a price-cutting campaign, which puts it in disadvantageous position. Also Volkswagen's adjustment to its new assembly line effects its production and this contributes to the position change," Xing said.

In Xie's eyes, the timing of the price drop may not be the only problem.

"The price cut strategy adopted by Volkswagen is in a rush to wage a counter fight against GM's long term price adjustment. Different from GM's move, which has been result of thorough market investigation, Volkswagen's act may be a little bit conservative, and not enough to touch consumers," Xie said last week.

Therefore, if the situation stays unchanged in July and August, then the German auto powerhouse may take further action to fight back, Xie said.

Veteran maker

Despite the temporary setback, analysts have not yet counted out Volkswagen -- a savvy operator after two decades in China.

"Volkswagen is bound to cut prices again this year," Zhang Xin of Guotai Junan Securities was quoted as saying by Reuters. "They are still tops... But ultimately sales are driven by pricing.

The European firm's venture in Shanghai is the larger of its two manufacturing ventures in the country. The German carmaker's other presence is in Changchun. There were reports recently, saying Volkswagen's Changchun venture production was 12,785 cars in June.

Including the Changchun operation, Volkswagen still sold more cars than GM. But the US automaker is closing the gap -- fast.

GM's car market share now stood at 12 per cent, the firm said last week, from about seven per cent at the end of 2002. Volkswagen commands about 34 per cent from a high of almost half.

"We've always been number two or three in the past," Zheng told Reuters. "But without seeing the overall sales for June, it's hard to say much about market share, except that the June ranking is quite encouraging."

Latest figures

Car sales in China slipped 7.1 per cent in June from May, the third straight monthly decline, data from the China Association of Automobile Manufacturers (CAAM) shows.

Car sales for June totalled 164,852, a rise of 2.2 per cent from June of 2003 but still the slowest growth in years.

Growth is lower in 2004, from the 76.8 per cent year-on-year rise posted in February and the 21 per cent gain in May. That has hurt stocks in Hong Kong-listed vehicle manufacturers such as Denway Motors Ltd.

Decelerating growth also spells trouble for multinational players from GM to Toyota Motor Co that are planning to spend some US$13 billion tripling capacity to six million cars a year by the end of the decade.

Now stockpiles of unsold cars are piling up.

According to CAAM, inventories had hit 142,249 sedans by the end of June.

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