Price wars eroding auto industry profits

China's automotive industry has raised a collective alarm over what insiders called "involution-style" competition, as government authorities, industry associations and automakers said that an unchecked race to the bottom will endanger the sector's long-term health.

According to the latest report from the China Automobile Dealers Association, price wars led to a cumulative retail loss of 177.6 billion yuan ($24.7 billion) in the new car market during the first 11 months of 2024, while over 60 car models saw price cuts in the first four months of this year.

Another report by the China Association of Automobile Manufacturers showed that from January to April, revenue and costs of the country's auto industry rose by 7 percent and 8 percent year-on-year, but profits fell by 5.1 percent.

China Iron and Steel Association issued a rare public rebuke of domestic automakers on Tuesday, accusing them of engaging in cutthroat price wars that have severely squeezed upstream suppliers' profits, leaving sectors such as steel with almost no profit margins.

To move beyond the dilemma, Yang Xueliang, senior vice-president of Geely Holding Group, said the company will stop expanding capacity and instead repurpose existing global production bases.

"Any company that engages in involution is bound to hit a dead end. Geely will never follow suit and will never become the king of involution, nor will we participate in vicious, destructive competition," Yang said.

"We are committed to pursuing a path of open and healthy competition, and move beyond price wars and into value wars, technology wars, and service wars," he emphasized.

Leading auto players are signaling support.

Changan Auto vowed to avoid "bottomless competition," while BYD said it is betting on tech innovation to stay ahead.

Since 2024, Chinese authorities have flagged "involution-style" competition as a systemic risk in high-level meetings.

Several top auto associations have urged automakers to stop cutthroat competition.

The Ministry of Industry and Information Technology said that price wars have no winners and no future and pledged to step up enforcement and push for structural upgrades in the industry.

The China Auto Dealers Chamber of Commerce, which is under the All-China Federation of Industry and Commerce, released a proposal urging industry reform, seeking the rejection of reckless discounting and a return to fair, rational competition to preserve industry health.

Dong Yang, former executive vice-chairman of CAAM, said: "Self-discipline alone won't solve the problem. It takes both a proactive government and a functioning market. Stricter law enforcement against unfair practices and targeted rules are needed to curb involution."

The root cause of such competition, according to An Tiecheng, chairman of the China Automotive Technology and Research Center, is that the market is developing fast, shifting from expansion to stock competition.

"Meanwhile, export prospects have been clouded by growing trade barriers, leaving automakers with little choice but to compete aggressively at home," he said.

Such price wars take a toll on the whole supply chain, as suppliers are under pressure to cut component prices by 10 percent to 15 percent annually, which raises the risk of corners being cut on quality, he added.

"Automakers should abandon short-term profit-seeking mindsets, build transparent supply chain management systems, and avoid excessively passing cost pressures along the value chain," he said.