China tackling price wars that takes a toll on its EV industry

BEIJING

The Chinese government is signaling enough is enough when it comes to the fierce competition in the country's electric car market.

China's industrial policy has engineered a remarkable transformation to electric vehicles in what is the world's largest auto market. In so doing, it has spawned far more makers than can possibly survive. Now, long-simmering concerns about oversupply and debilitating price wars are coming to the fore, even as the headline sales numbers soar to new heights.

Market-leader BYD announced this week that its sales grew 31 percent in the first six months of the year to 2.1 million cars.

Nearly half of those were pure electric vehicles and the rest were plug-in hybrids.

BYD came under thinly veiled criticism in late May when it launched a new round of price cuts, and several competitors followed suit.

The chairman of Great Wall Motors warned the industry could come under threat if it continues on the same trajectory.

“When volumes get bigger, it’s just much harder to manage and you become the bullseye,” said Lei Xing, an independent analyst who follows the industry.

The government is trying to rein in what is called “involution” — a term initially applied to the rat race for young people in China and now to companies and industries engaged in meaningless competition that leads nowhere.

BYD has come under criticism for using its dominant position in ways that some consider unfair, sparking price wars that have caused losses across the industry, said Murthy Grandhi, a financial risk analyst at GlobalData.

With the price war in its fourth year, Chinese automakers are looking abroad for profits. BYD's overseas sales more than doubled to 464,000 units in the first half of this year. Worried governments in the U.S. and EU have imposed tariffs on made-in-China electric vehicles, saying that subsidies have given them an unfair advantage.

The latest bout of handwringing started when BYD cut the price of more than 20 models on May 23.

The same day, the chairman of Great Wall Motors, Wei Jianjun, said he was pessimistic about what he called the "healthy development” of the EV market.

He drew a comparison to Evergrande, the Chinese real estate giant whose collapse sent the entire industry into a downturn from which it has yet to recover.

Next, the government weighed in.

The Ministry of Industry and Information Technology vowed to tackle involution-style competition in the auto industry, saying that recent disorderly price wars posed a treat to the healthy and sustainable development of the sector.

“That price cut might have been the final straw that irked both competitors and regulators for the ruthlessness that BYD continues to show,” Lei said.

The following month, 17 automakers including BYD made a pledge: They would pay their suppliers within 60 days.

One way China's automakers have been surviving the bruising price wars is by delaying the payments for months. The agreement, if adhered to, would reduce financial pressure on suppliers and could rein in some of the fierce competition.

It also reduces the risk of an Evergrande-like scenario.