?Editor's Note

The domestic automobile market is highly competitive, with price wars being the most direct manifestation, driven by various factors. While the survival of the fittest is normal in the market, it is urgent to prevent vicious competition from spiraling into involution. Enterprises should adhere to legal principles, strengthen self-discipline, seek differentiated competitive advantages through innovation, adopt diversified competitive strategies, and practice long-term thinking. Building a healthy competitive ecosystem is a shared responsibility of industry enterprises. 

Focusing on the impact of involutionary competition on the automobile industry, "Auto Review" has produced this special "Cover Story" report. This special report consists of 5 articles, with the 3rd one released today. Please stay tuned.

Joint venture automobile brands led by BBA (BMW, Benz, and Audi) have begun reducing car purchase incentives, showing a trend of withdrawing from the "price war." However, in the face of the strong rise of Chinese brands, they must take other better measures to seek "breaking out" of the low-level competition.

Amidst the swirling price wars, who dares to reject being dragged into the fray? Following BMW's announcement that it would focus on business quality in the Chinese market in the second half of the year and support dealers in taking a steady approach to deal with short-term market challenges, Audi and Mercedes-Benz have also started reducing incentives, demonstrating their determination to withdraw from the price war with concrete actions. The moves by BBA immediately attracted industry attention and discussion. Some believe this is a reluctant step taken by luxury car brands that cannot afford the price war, while others argue that they dared to jump out of the involutionary cycle because they made a wise choice from a long-term development perspective. "To maintain market share, BBA actively participated in the price war for a while, but due to squeezed profit margins, the mindset of multinational automakers has shifted. It is estimated that they considered the healthy development of automakers more important than sales, leading to their withdrawal from the price war," said Zhong Shi, an automotive industry analyst, in an interview. Perhaps some second-tier luxury brands will follow suit, but more mass-market joint venture automakers may still struggle to avoid being dragged into the fray, he added.

BBA Prices Are Rebounding

Reports indicate that BMW dealers received notifications from manufacturers to reduce their annual wholesale sales targets by 15% as early as the week before BMW officially announced its withdrawal from the price war. This, combined with a 15% reduction announced in June, resulted in a nearly 30% decrease in tasks for the year. Additionally, the threshold for dealer rebates was lowered, financial penetration and secret inspections (referring to secret evaluations of 4S dealership services by automakers) were eliminated, giving BMW dealers more room to adjust car prices and incentives.

On July 12, BMW China announced that it would focus on business quality in the Chinese market in the second half of the year, supporting dealers in taking a steady approach and withdrawing from the price war. It will further implement a policy of "reducing volume to maintain prices" to address dealer losses caused by the price war. Dai Hexuan, CEO of BMW Brilliance, said, "Prices are determined by dealers as independent business entities. BMW will maintain close discussions with upstream and downstream partners to explore sustainable business models to ensure that all partners can earn sufficient profits and survive into the future."

A survey found that product prices at several BMW 4S dealerships in Beijing have increased, ranging from several thousand to tens of thousands of yuan. A BMW salesperson told the media that BMW had indeed raised prices across the board from July 1, and the manufacturer had also reduced monthly sales targets. For example, the BMW 3 Series, which previously offered a 31% discount on BMW Financial Services loans with a 36% bank loan, now offers a 26% discount, an increase of approximately 15,000 yuan.

After the news of BMW's price increase trended on social media, reports emerged that Audi and Mercedes-Benz dealership prices had also rebounded. An Audi salesperson said, "Compared to transaction prices in mid-to-late June this year, prices have indeed risen. However, compared to previous prices, this can only be considered normal market fluctuations." Zhong Shi believes that BBA's withdrawal from the price war represents a rational return. They have finally realized that luxury cars, which value brand premium, are not suitable for significant price cuts, and such cuts do not significantly boost sales.

Joint Venture Automakers Begin to Follow Suit

Following BBA, other joint venture brands have also been rumored to be increasing prices for some models.

A salesperson at a FAW-Volkswagen 4S dealership in Shanghai revealed that starting from August 15, the discount margins for all models in the store have been reduced. It is speculated that in September and October, prices may increase slightly, with additional gifts or packages offered as an indirect promotional measure. Overall prices are not expected to differ significantly from current levels. Toyota salespeople confirmed the reduction in incentives and stated that prices would rise by a few thousand yuan compared to previous levels, with further reductions in incentives possible next week. Volvo salespeople noted stable prices currently but indicated potential adjustments due to potential production cuts in the second half of the year. A Buick salesperson told the media that although some Buick models are still discounted, the discount margin may decrease for later purchases. Similarly, an official from Dongfeng Honda responded to media inquiries about a rumored withdrawal of incentives from August, stating that price fluctuations are market-driven and influenced by many factors, adding that "competing on price is not a long-term solution for Dongfeng Honda."

Moreover, a rumored price increase notice circulated online for SAIC Volkswagen dealers, stating that prices would rise by 3,000 to 10,000 yuan across all models from August 1 to August 11, with an additional 2,000 yuan increase from August 12 onwards. However, SAIC Volkswagen responded that it had not received such a notice.

Some insiders suggest that recent reductions in incentives by joint venture brands are not necessarily following BBA's withdrawal from the price war but rather due to cyclical sales patterns in the automotive market. Typically, incentives shrink in the third quarter and change during the fourth quarter sales peak.

Performance Pressures Mount

Both BBA and other joint venture brands have faced significant performance pressures due to intensifying industry involution in recent years.

The latest financial reports for the first half of the year show that BMW Group generated revenue of 73.558 billion euros, down 0.7% year-on-year, with a net profit of 5.656 billion euros, down 14.6%. Mercedes-Benz's revenue for the first half was 72.616 billion euros, down 4% year-on-year, with a net profit of 6.087 billion euros, down 20% from the same period last year. Audi Group's revenue declined the most, falling 9.5% year-on-year to 30.939 billion euros, with an operating profit of 1.982 billion euros, down 42% year-on-year. All three automakers mentioned underperforming results in the Chinese market in their financial reports. For example, BMW stated that consumer confidence in the Chinese market remained low, leading to lower-than-expected sales. Audi faced challenges from increased competition and a shrinking premium auto market in China, while Mercedes-Benz explained a slight contraction in the Chinese market and continued weakness in the premium and luxury car segments.

Compared to BBA, other joint venture brands face even greater difficulties. Statistics show that mainstream joint venture brand retail sales in June totaled 480,000 units, down 27% year-on-year and 1% month-on-month. German brand retail sales accounted for 18.6% of the market, down 2.6 percentage points year-on-year; Japanese brands accounted for 14.3%, down 3.5 percentage points; and American brands accounted for 6.3%, down 2.9 percentage points. Most joint venture automakers saw declines in sales in China in the first half of the year, with only a few, such as SAIC Volkswagen, Yueda Kia, and Changan Ford, reporting growth.

Based on this, some analysts suggest that the reduction in incentives reflects a more rational and cautious attitude among some joint venture brands in balancing dealer interests and sales expectations. Furthermore, market trends indicate that consumers are increasingly focused on product quality, service experience, and brand value rather than solely on price, making over-reliance on price wars unwise.

However, Zhong Shi noted that luxury automakers like BBA have the strength to actively break out of the involutionary cycle. While Chinese brands have made breakthroughs in premiumization and captured some of BBA's market share, BBA remains dominant in the mid-to-high-end luxury car market. The overall structure of the luxury car market is unlikely to change significantly in the short term. Led by BBA, some second-tier luxury brands may gradually realize the unsustainability of price wars and adopt similar strategies to preserve brand value. In contrast, more mass-market joint venture brands may struggle to avoid being dragged into price wars due to their emphasis on sales volume, according to Zhong Shi.

Price Increases Beneficial to Sales?

Interestingly, public opinion has divided into two camps since BBA's price adjustments.

One side argues that BBA's sales have increased despite withdrawing from the price war. A dealer noted, "After reducing incentives, BMW has seen an increase in customers. Coupled with reduced losses from the price hike, it's a relief." Evidence shows that BBA sales increased significantly during the week of July 15-21. For example, Mercedes-Benz sales increased by 2,400 units, or 18.26%, while BMW and Audi sales also grew by 11.67% and 23.76%, respectively.

The other side contends that BBA sales declined collectively after price hikes, citing July sales data. Mercedes-Benz sold 49,568 units in July, down 3,398 from June; BMW sold 48,951 units, down 6,629 from June's 55,580; and Audi sold 45,233 units, down 7,586 from June. A BMW salesperson noted, "After the price hike, first-time store visits fell by over 20%, orders decreased by 30%, and electric car orders plummeted by 75%. While deliveries fell less due to backlogged orders, they will decline significantly in August after those orders are fulfilled."

However, judging solely based on July and June sales figures may be misleading. Firstly, BBA sales declined overall in the first half of the year. Statistics show that BMW sold 375,900 units in China from January to June, down 4.2% year-on-year; Mercedes-Benz sold 352,600 units, down 5.8%; and Audi's global sales declined 8.2% year-on-year to 838,000 units. This indicates that price cuts did not significantly boost BBA sales, rendering "trading price for volume" ineffective. Secondly, BBA offered significant discounts in June, leading to higher sales. Therefore, a decline in July sales after returning to normal prices is reasonable. Furthermore, BBA's decision to withdraw from the price war necessarily considered the short-term impact on sales. For them, long-term brand value and corporate profits are more important.

It's worth noting that despite BBA's reluctance to withdraw from the price war, their absolute profit levels far exceed those of Chinese brands. Financial reports show that Audi Group's operating profit was 1.982 billion euros (approximately 15.5 billion yuan) in the first half of 2024, Mercedes-Benz Group's net profit was 6.087 billion euros (approximately 48.413 billion yuan), and BMW Group's net profit was 5.656 billion euros (approximately 44.985 billion yuan). In comparison, only BYD achieved a full-year net profit exceeding 30 billion yuan in 2023, while SAIC Motor, Changan Automobile, and NIO were among the few Chinese automakers to surpass 10 billion yuan.

It can be said that BBA's high profits provide a solid foundation for their decision to withdraw from the price war in the Chinese automotive market. The question remains how long other automakers with lower profit levels can sustain their participation in price wars.

The Path to Breaking the "Involution" Cycle

Price wars are just one manifestation of the industry's involution in recent years. Especially for foreign and joint venture brands, amid the wave of electrification, intelligence, and connectivity, they must take additional measures beyond escaping low-level competition to seek "breaking out" in the face of the strong rise of Chinese brands.

On July 25, Honda Motor announced that it would close a plant operated by Guangzhou Honda and suspend production at a Dongfeng Honda plant in response to fierce competition in China's electric vehicle market. This reduces Honda's annual gasoline-powered vehicle production capacity in China from 1.49 million to 1 million units. This is Honda's first production cut in China and the largest by a Japanese automaker in the country.

While cost reduction and efficiency enhancement can provide temporary relief, the fundamental solution lies in accelerating transformation, such as unwaveringly promoting full electrification. On June 27, SAIC Volkswagen signed a series of new energy technology cooperation agreements, including agreements to develop three plug-in hybrid models and two pure electric vehicle models in China. It is expected that multiple plug-in hybrids and pure electric vehicles developed through these collaborations will be launched on the market starting in 2026. SAIC General Motors has also taken action. On August 9, SAIC General Motors announced that Lu Xiao, former Executive Deputy General Manager of Pan Asia Technical Automotive Center, would succeed Zhuang Jingxiong as General Manager of SAIC General Motors, as decided by the SAIC Motor Party Committee. "As the parent companies, General Motors and SAIC Motor will provide SAIC General Motors with the most advanced technologies to support its accelerated and comprehensive healthy transformation towards the future," Lu Xiao recently stated. "In the future, SAIC General Motors will gain more localized product development decision-making rights, meaning that the product definitions and development of many new models will be 100% tailored to Chinese market demands and led by our Chinese design and engineering teams."

A research report from CITIC Securities believes that due to slow responses to market demand changes and lagging strategic decisions, joint venture brands generally missed out on the rapid increase in new energy vehicle penetration in China from 2020 to 2022. However, joint venture brands are now transitioning from being forcibly dragged into price wars to gradually returning to rationality, sacrificing some sales to exit vicious competition and actively accelerating transformation. It is believed that they will find their own path to stand out in the fiercely competitive market environment with Chinese automakers.

Note: This article was first published in the "Cover Story" section of the September 2024 issue of "Auto Review" magazine. Please stay tuned for more. Related reports: Cover Story (I): The Inflection Point is Near, It's Time to "Pull Back" Cover Story (II): Exclusive Interview with Xu Haidong: "Seating" at the Card Table is the Toughest Challenge for Automakers

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