China’s Auto Sector Faces Mounting Pressure From Weak Demand and Rising Costs

Narrowing profit margins due to higher raw material costs have dealt yet another major blow to China’s carmakers as they face shrinking market demand amid a rollback of purchase subsidies and tax incentives.

The dire scenario could also dash Chinese consumers’ hopes for steep discounts, despite carmakers’ efforts to reduce their inventories, according to dealers and analysts.

“The crux point is that most carmakers are facing squeezed margins and are unable to offer further price cuts to attract buyers,” said Qian Kang, the owner of a vehicle circuit board factory in eastern China’s Zhejiang province.

“It is expected that several small players may be edged out because of weak sales.” Net earnings derived from selling a car priced at 100,000 yuan (US$14,780) now stood at just 1,500 yuan, translating into a profit margin of only 1.5 per cent, Chen Shihua, deputy secretary general of the China Association of Automobile Manufacturers (CAAM), told an industry conference in Changchun, the capital of northeastern China’s Jilin province, last week.

That represented a sharp decline from the 3.4 per cent profit margin in May, according to numbers released by the China Passenger Car Association (CPCA).

Government statistics show that downstream manufacturing sectors in mainland China reported an average profit margin of 6.1 per cent two months ago.

In the first half of this year, sales of cars on the mainland plunged 20.2 per cent year on year to 8.7 million units, according to data from the CPCA.

The decline in car sales on the mainland, the world’s largest automotive and electric vehicle (EV) market, has coincided with Beijing’s paring back ­of subsidies and tax incentives.

Buyers of a 100,000 yuan EV now receive a subsidy of 12,000 yuan, down 40 per cent from last year. At the same time, consumers who were previously exempt from the 10 per cent vehicle purchase tax are now required to pay a 5 per cent levy as authorities gradually phase out incentives.

Rising prices of raw materials such as memory chips have also ratcheted up pressure on carmakers as they struggle to spur sales through promotional activities.

William Li, CEO of Shanghai-based premium EV maker Nio, told reporters at a media briefing early this month that surging raw material prices had led to an extra production cost of 20,000 yuan per vehicle, and admitted that carmakers were under heavy pressure to keep their businesses afloat. At the end of last month, global consultancy AlixPartners said slowing car sales would fuel a brutal price war in the second half of this year since the mainland’s overall auto industry remained profitable.

It said that of the nearly 30 Chinese carmakers that only made EVs, just three – BYD, Leapmotor and Xiaomi – were profitable because of their high research and development costs.

Beijing has been urging carmakers to quit price wars and avoid heavy losses since the middle of last year. It bars carmakers from selling vehicles below cost to increase their market share.