Vienna, Beijing Many car manufacturers are profiteers from the crisis. Because a lack of semiconductors and wiring harnesses kept the vehicle supply tight, Volkswagen, Mercedes-Benz and BMW were able to push through ever higher prices. They achieved dream returns of more than 14 percent in some cases.
In return, according to market research DAT, new cars for German consumers rose in price by 13 percent to 42,790 euros in the previous year alone. Vehicle prices also reached an all-time high in 2022 in the United States and key other markets. But now there are increasing signs that these are likely to gradually fall again. “The record values are unsustainable,” says Arndt Ellinghorst, car expert at the data analysis company Quantco.
There are three reasons for this: First, Tesla is forcing its price war on electric cars, which is increasingly affecting all segments and drive types. Only on Friday night did the US manufacturer lower its prices in Germany again by up to 6,000 euros. Secondly, the industry as a whole is sitting on considerable overcapacities. And thirdly, the majority of consumers lack the money to be able to finance expensive models.
The result: In January and February, the list prices of the 60 best-selling cars in Germany have already fallen by around 2,300 euros on average, Ferdinand Dudenhöffer has calculated. The head of the Center Automotive Research (CAR) is certain: “The days of picture book prizes are over. The car business is getting much tougher again.”
In fact, incoming orders in many countries have been falling for months. At the same time, the discounts and the range of vehicles with slimmed-down equipment variants are increasing. The analysts at the major Swiss bank UBS therefore calculate that the earnings per share of listed vehicle manufacturers such as VW, Renault, Ford, BMW, Stellantis and GM will fall by an average of 40 percent this year compared to the previous year.
A price war for electric cars is raging in China
China is at the epicenter of the foreseeable shrinking of margins, where “Auto Shanghai”, probably the most important industry trade fair of the year, is currently beginning. China is the largest car market in the world and has so far been a guarantee of profits for many Western vehicle manufacturers. Mercedes, for example, sells nowhere else so many S-Class sedans of the ultra-luxurious Maybach variant (base price: 175,417 euros).
But the classic combustion engine business in China is shrinking. High growth rates can only be achieved with pure electric cars and plug-in hybrids. And in this segment, a bitter price war is raging in the country.
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In October last year, Tesla – after BYD the number two in the world’s largest electric car market – significantly reduced list prices in order to regain market share. In January, the US manufacturer offered further discounts for vehicles manufactured at the Gigafactory in Shanghai. Some models cost up to 14 percent less than last year and some are only half as expensive as in Europe or the USA.
In order to keep up in the highly competitive market, many local as well as international competitors have followed suit: at least 40 car manufacturers in China have recently lowered their prices. The electric car newcomers Nio and Xpeng were among them, as was the volume manufacturer BYD. The dealers of BMW, Mercedes-Benz and Volkswagen also granted some high discounts.
The US group has recently reduced prices in several markets.
(Photo: Reuters)
Last year, the president of the electric car start-up Li Auto, Shen Yanan, emphasized in an interview with the Handelsblatt that Audi, BMW and Mercedes would have to “significantly lower” their prices in China over the next two years in order to cope with the increasingly tough market to keep up with the competition. The Germans don’t want to know anything about it yet.
“We will not take part in these price wars,” BMW boss Oliver Zipse recently told Handelsblatt during a flying visit to Beijing. After the pandemic, there will be a short-term stock sell-off, the manager believes. This also has to do with the fact that the government could introduce a new emission level. He therefore considers the price war to be temporary.
BMW boss Oliver Zipse: “Don’t sell premium”
BMW is also active in the upper market segments, so you shouldn’t “let yourself get nervous”. Once a price has been lowered, it cannot be increased in the future, Zipse explained. “Don’t skimp on premium.”
Mercedes boss Ola Källenius sees it that way too. “We want to ensure reasonable pricing for excellent products,” emphasized the Swede in an internal letter to his executives in March. “But it will take more strength in the future to maintain this position.” The competition is getting tougher.
“We want to ensure reasonable pricing for great products.”
(Photo: dpa)
The German auto industry is still in a state of self-denial, writes Tu Le, founder of the consulting firm Sino Auto Insights, in a recent analysis. The car expert states that BMW and Mercedes are in a comparatively good starting position. For mass manufacturers like Volkswagen and its premium subsidiary Audi, however, the coming years will be “very painful,” says Le.
The Wolfsburg could still prevent the worst, but there was no time for “further dawdling or arrogance”. And if the luxury brand Porsche, which is extremely successful in China, “sneezes a bit, the VW group will probably have to go to the hospital”.
>> Read about this: German electric cars fail in China – new figures show the drama of the situation
Le expects Chinese manufacturers to expand into Europe in a big way as a result of the price war in their home market. He assumes that 15 to 20 car brands will push into one or more European markets this year. The range of electrical equipment from Western manufacturers is still manageable. The Chinese electronic attackers are now pushing into this gap.
Meanwhile, the Chinese industry association CAAM is calling for an end to the price war. The industry should “return to normal operations” to ensure healthy development, the association wrote on the social media platform Wechat.
Analysts expect further price cuts at Tesla
Admittedly, such calls have not yet been answered. On the contrary. The discount battle has long spilled over to other regions. Before the announcement in Germany, Tesla had lowered its list prices for all series in the USA for the second time this year.
The Model 3 now costs about $5,000 less than at the beginning of the year; the performance variant of the sedan is now even cheaper by $10,000. The price of the Model Y electric SUV has been reduced by $13,000 to $52,990. And further cuts are expected on the stock exchange.
>> Read about this: Analysts expect new price cuts at Tesla – and increased competition in the car market
“Investors should expect further relentless price falls,” said Alexander Potter, an analyst at US investment bank Piper Sandler. The background is that Tesla wants to accelerate the phasing out of combustion technology – in favor of its own electric cars. In addition, Tesla can afford a price war better than its competitors due to its low fixed costs and high profitability.
“The price war has only just begun,” believes CAR director Ferdinand Dudenhöffer. No manufacturer can escape the wave of discounts, otherwise they would be “segregated” from the market, i.e. lose their customers.
Dudenhöffer assumes that prices for diesel vehicles and petrol engines will soon fall more sharply. Especially as many consumers pay more attention to their money in the wake of high inflation and the global market is heading towards oversupply.
UBS car expert Patrick Hummel, for example, expects global car production to increase by 86 million vehicles this year. However, actual sales are likely to be almost five million units lower. Hummel warns that the gap between production and sales will increase inventories and price pressure in the industry.
Margins could ease in the second half of the year
In fact, the prices for new cars in the US are likely to fall by up to five percent this year and those for used cars by a good ten percent, predict the experts at JP Morgan Research. This is a “normalization” at a high level, says Quantco car specialist Arndt Ellinghorst. In Europe and especially in China, on the other hand, he expects significantly larger discounts from time to time.
However, the foreseeable discounts will probably only show up in the balance sheets of the car manufacturers with a time lag. In the first quarter, the results across the industry are likely to be rock-solid to very good, says an investment banker. In the second half of the year at the latest, however, the margins could start to crumble noticeably.
In China, some manufacturers are already struggling to survive. Evergrande Auto, a subsidiary of the ailing real estate group Evergrande, recently warned it would have to stop production if the company didn’t get fresh money. The manufacturer has only delivered around 900 vehicles so far. Despite ambitious announcements and futuristic prototypes, other suppliers have not yet put any cars on the road at all.
Since 2009, the government has funded the development of the Chinese electric car industry with the equivalent of more than 120 billion dollars. Attracted by the high subsidies, many new companies ventured into the segment. It is estimated that there are more than 300 providers. As early as 2021, the then Industry Minister Xiao Yaqing emphasized that there were “too many” and announced that he would promote consolidation. Now the selection process could start.
For Tesla, the originator of the price war in China, the maneuver has not paid off so far. On social media, the carmaker not only drew sharp criticism from Tesla customers who bought their vehicle at higher prices last year. In the first two months of the year, the US car manufacturer also lost further market share compared to its main competitor BYD.
More: “It’s a drama” – Car manufacturers are increasingly relocating production abroad.