16 Jul Reuters : Beijing’s autos intervention is a necessary evil

Media Source : Reuters

07 JUL 2023

By Katrina Hamlin

HONG KONG, July 7 (Reuters Breakingviews) – Beijing has engineered an unlikely truce in an attempt to end China’s car wars. On Thursday, regulators orchestrated an agreement between Tesla (TSLA.O) and 15 Chinese rivals to avoid “abnormal pricing”, sealing the deal at a signing ceremony in Shanghai, Bloomberg reported. It’s a desperate effort to contain the damage. But it might just be worth it.

There were casualties along the way. More than 30 carmakers slashed prices in the first quarter alone, according to Bill Russo at Shanghai-based consultancy Automobility. Some, including FAW Audi and BAIC Hyundai, doled out discounts of as much as 20% by June, research from Citi shows.

That weighed heavily on the bottom line for the country’s legions of electric-car makers. Nio (9866.HK), reported that its vehicle margin, which reflects revenue from new automobiles less the cost of sales, contracted to 5.1% in the first quarter, compared with 18.1% in 2022. Xpeng (9868.HK), said its equivalent margin dropped to negative 2.5% from 10.4% a year earlier. Drawn-out discounting threatened to push weaker marques out of business in the longer term. Many are already struggling: some 85% of China’s electric-car brands are unlikely to survive to 2030, consultants AlixPartners predicted on Wednesday, just a day before the truce was announced.

But the impact on traditional automakers was also severe. They were under pressure to offload old inventory as China prepared to start enforcing stricter emissions standards in July. Perhaps as a result, sellers of internal combustion engines frequently offered steeper discounts compared to battery-powered rivals, Citi’s data show.

Despite that, many consumers opted to road-test new technology as battery-powered cars became more affordable. Legacy models continued losing market share as the price war dragged on. New energy vehicles accounted for 26% of total sales in the world’s largest auto market in May, compared with 22% in January, according to Refinitiv data. Both Tesla and BYD (002594.SZ), (1211.HK) achieved record deliveries of their China-made vehicles in the second quarter.

Government interference is not always welcome, nor effective. In this case, at least, it appears to be trying to keep competition healthy, targeting only “abnormal pricing”. Defining that could prove tricky, though, and the non-binding, vaguely worded compact only applies to 16 companies. If nothing else, Beijing’s intervention offers a welcome pause in hostilities.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own. Updates to add chart.)

CONTEXT NEWS

A group of 16 automakers have agreed to avoid “abnormal pricing” in China, confirming their commitment at a signing ceremony in Shanghai on July 6, Bloomberg reports. The country’s Ministry of Industry and Information Technology directed the China Association of Automobile Manufacturers to gather the group, which included Tesla and 15 Chinese companies.

The price of a Tesla Model 3 (single motor) fell to around 230,000 yuan in June, from around 280,000 yuan a year earlier, according to research published by Citi on June 19. Other brands offered discounts of as much as 20% in June, the report said.

Over 30 brands in China announced discounts in the first three months of the year, according to industry consultancy Automobility.

Editing by Antony Currie and Thomas Shum

SOURCE: https://www.reuters.com/breakingviews/beijings-autos-intervention-is-necessaryevil-

2023-07-07/