Mainland car prices expected to drop 5pc
Car prices on the mainland are expected to fall by an average of 5 per cent this year due to oversupply in the market, according to the National Development and Reform Commission. Prices dropped an average of 4 per cent last year.
Amid intense competition, prices for medium and high-end vehicles have already been reduced, and low-end models will follow suit.
Analysts take a similar view, saying the country's motor industry will experience further price reductions of 3 per cent to 5 per cent this year as vehicle prices on the mainland are generally higher than those overseas.
A China Merchants Securities research report said continuous price reductions would add to pressures on small carmakers, squeezing their profitability and market share.
A report from KPMG contains a sobering message for big carmakers, such as Volkswagen and General Motors Corp, that they will not see the levels of profitability enjoyed in the 1990s because of the need to resort to price cuts and zero-interest financing packages to grab market share.
However, the China Merchants Securities report also pointed out that price-cutting was an efficient marketing technique, which might not hurt profitability that significantly if applied only to old models.
As it stands, the balance sheets of some small carmakers already show the effects of price reductions. In the first three quarters of last year, Tianjin FAW Xiali's earnings plunged 115.35 per cent to 17 million yuan while Hong Kong-listed Geely Automobile Holdings posted a 31.9 per cent fall in first-half profit to HK$82.42 million
The NDRC said in its report that price-cutting could speed up industry consolidation by eliminating inefficient players.
Fitch Ratings also took a relatively positive view, saying in its annual report on the industry that operating margins would remain stable even though pricing pressures would persist this year.
Fitch expects that robust demand, improving economies of scale and declining procurement costs for foreign parts on the back of a strengthening yuan will help offset the impact of the price war.