Car makers greet 2005 with price cuts
(China Daily)
Updated: 2005-01-06 09:56

China's slowing car market has driven into the new year with a new round of price cuts.

January 1 not only ushered in the new year, it also saw the advent of huge price reductions by some of China's auto manufacturers.

FAW Car Co Ltd, the Shenzhen-listed arm of China's top vehicle producer First Automotive Works Corp (FAW), slashed the prices of Mazda6 sedans, produced under technical licensing deals with Mazda, by 25,000-40,000 yuan (US$3,020-4,830) on January 1.

Tianjin FAW Automobile Co, another affiliate of FAW, axed the prices of its Vizi and Vela compact cars by up to 15,000 yuan (US$1,800) on the same day.

A slew of other automakers in China will also launch price cuts this month, such as Nissan's joint venture with Dongfeng Motor Corp and Kia's venture in eastern Jiangsu Province, according to market sources.

The prices of many imported cars, including models made by Volvo, Land Rover, Hyundai and Skoda, dropped over the past week thanks to China's tariff cut under its obligations to the World Trade Organization.

These price cuts are a continuation of the red-hot price wars fought last year by manufacturers eager to boost sales and clear huge inventories, said Jia Xinguang, chief analyst of the China Automotive Industry Consulting and Development Corp.

"There appears to be no other way to attract customers, so producers will use price cuts to attempt to get the upper hand this year," Jia said.

Prices in the domestic car market are forecast to fall at a faster rate this year than last year.

Average prices will drop by 15 per cent or more this year, compared to last year's fall of 10 per cent, said Cao Jianhai, an industrial researcher with the Chinese Academy of Social Sciences.

Almost all domestic and foreign automakers cut the prices of their China-made cars last year, ranging from local players Chery and Geely to the world's premium brands Audi and BMW.

However, car sales growth in China has slowed down sharply due to banks' controls on car loans, high oil prices and customers' persistent anticipation for cheaper cars, despite manufacturers' frequent price cuts.

And these price cuts have become so frequent that customers are expecting even more to take place, meaning that they are sitting on the sidelines awaiting further reductions, which will further depress the car market.

Cao said that the domestic car market will grow by 10 per cent year-on-year in 2005.

Xu Changming, from the State Information Centre, predicted that the total sales of China-made vehicles will grow 12 per cent year-on-year to 5.64 million this year, with that of passenger car sales increasing 16 per cent to 2.64 million units.

Xu estimated that total sales of China-made vehicles and sales of passenger cars reached 5.04 million and 2.27 million units last year, up 16 and 18 per cent year-on-year.

Year-on-year growth in total vehicle and passenger car sales in China stood at 34 per cent and 75 per cent in 2003.

"Car prices will continue to be brought down mainly by automakers in China instead of imported cars as the latter only accounts for a tiny slice of the overall domestic car market, although the nation will continue to cut tariffs," Xu said.

Imported vehicles control some 4 per cent of the domestic auto market.

China removed quotas on vehicle imports and cut tariffs to 30 per cent on January 1 from last year's 34.2-37.6 per cent.

These tariffs will fall to 25 per cent by the middle of next year.

China Association of Automobile Manufacturers spokeswoman Zhu Yiping suggested domestic automakers should cut their production in order to maintain price stability.

"They discuss joint action in the same way as members of OPEC (the Organization of Petroleum Exporting Countries) are doing. Some automakers' price cuts were harebrained and destroyed customer confidence," Zhu told China Daily.

Xu said prices in the domestic car market will stabilize next year.

"However, car prices in China will tumble by 50 per cent in four years due to mounting competition, domestic producers' expanding economies of scale, and lower income levels and labour costs in China than in the developed markets," Cao said.

Domestic car prices will ultimately be 40 per cent to 50 per cent lower than in developed markets, Cao said.

Oversupply in the domestic car market will continue to grow this year as a result of new production capacity built by producers and slowing car sales, he added.

Car production capacity in China will be 30 per cent larger than real domestic car demand this year, up from last year's 20 per cent, he said.

Car makers' and dealers' total inventories stood at nearly 600,000 at the end of last year, according to reports.

"Many automakers in China will suffer losses in 2006 because of slowing sales and diving car prices," he said.

There are around 120 vehicle plants in China, with more than 30 turning out passenger cars.

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