New Guidelines Target Below-Cost Sales
China's State Administration for Market Regulation (SAMR) announced new guidelines on Thursday aimed at curbing a prolonged and intense price war within the country's automotive sector. The regulations explicitly prohibit manufacturers, dealers, and suppliers from setting prices below the total production cost of vehicles. Violators of these new rules face 'significant legal risks,' according to the regulator.
The definition of 'total production cost' has been broadened to encompass not only factory manufacturing expenses but also indirect costs such as administrative fees, financing costs, and sales management expenses. This measure seeks to close loopholes previously used by companies to justify aggressive discounting. The guidelines also ban price collusion between automakers and suppliers and forbid forcing dealerships to sell at loss-making prices.
Response to Steep Sales Decline and Industry Losses
This regulatory intervention comes in the wake of a substantial downturn in the Chinese auto market. Passenger car sales in January plummeted by 19.5% year-on-year, marking the fastest decline in almost two years. A total of 1.4 million passenger cars were sold in January, a significant drop from the 2.2 million units sold in December.
The aggressive price war has inflicted considerable financial damage on the industry, with an estimated loss of 471 billion yuan ($68 billion) in output value across the sector over the past three years. Data from the China Automobile Dealers Association indicated that 55% of Chinese auto dealers were operating at a loss as of the third quarter of last year.
Factors Fueling the Price War
Several factors have contributed to the intense competition and price reductions. Weakening consumer demand, partly due to cash-strapped buyers, has played a significant role. Additionally, a reduction in tax exemptions for electric vehicle (EV) purchases and uncertainties surrounding EV trade-in subsidies in various regions have dampened sales. The EV segment, in particular, has seen fierce competition, with numerous domestic brands vying for market dominance by slashing prices and offering incentives amidst slowing demand and rising inventories.
Broader Implications and Future Outlook
Beyond pricing, the new regulations also address transparency in online sales and software-driven vehicle features. Online car sales platforms are now expected to monitor listings and issue 'dual-risk alerts' for unusually low-priced offers. For vehicles with software features, manufacturers must clearly disclose free trial durations and subsequent fee structures at the time of sale, preventing undisclosed services from later becoming paid subscriptions.
The SAMR's move aims to foster fair competition, prevent market disruption, and ultimately restore consumer confidence. While analysts anticipate domestic demand to dip further this year, with S&P forecasting a potential 3% fall in light vehicle sales in 2026, some industry experts believe the market is transitioning. Li Yanwei, an analyst with the China Automobile Dealers Association, stated that the automotive market has 'officially transitioned from a 'price war' to a 'value war'.'
4 Comments
Muchacho
While the aim to stop market losses is understandable and necessary for industry survival, these strict measures could unintentionally reduce affordability for average consumers and slow down market adjustments. It's a delicate balance.
Habibi
Price wars, while tough, often force companies to improve. This regulation removes that pressure.
ZmeeLove
Another blow to consumer choice and affordable options. This is anti-consumer.
Muchacho
This ensures fair competition and focuses on quality, not just endless discounting. Smart.