That Chinese EV Price War Truce Dissolved Real Quickly — What Does That Mean? – CleanTechnica

A little more than a week ago, I wrote about a price war truce (among other things) made among Chinese automakers, including Tesla. At the time, I pondered that such an agreement would seemingly be a clear violation of antitrust laws in the US and Europe. What I missed is that the agreement apparently got broken and dissolved almost immediately, and that it seems it was determined that this did violate antitrust laws. Steve Hanley shared news with me from Reuters about this, noting, “It turns out you were prescient. You may want to do an update to your China EV truce story.” Maybe I even stimulated the response! Well, let’s not get carried away, but let’s have a look at some of the updates.

How & Why The EV Price Truce Dissolved

A funny thing is that aside from representatives of the 16 companies that signed the agreement, an official from China’s Ministry of Industry and Information Technology reportedly witnessed the signing. I guess one can be forgiven for thinking it doesn’t violate antitrust laws when a rep from China’s Ministry of Industry and Information Technology is present. It may also have been thought that a commitment to “not disturb fair competition in the market with abnormal pricing” is a fine agreement. After all, that almost sounds like an agreement to not do anything illegal in terms of pricing — even though it’s really about stopping price cuts in order to save the companies’ bank accounts. Also, as Reuters reports, “Liu Xu, a researcher at the National Strategy Institute of Tsinghua University, said enforcement of antitrust law in China’s auto industry had been selective and that the language of the pricing pledge was so vague it would be hard to determine if it constituted a price monopoly.” However, almost right after the agreement was made, the China Association of Auto Manufacturers (CAAM), which had arranged the meeting and agreement, said in a statement that realized the agreement had actually violated China’s antitrust law. Thus, it retracted the agreement and that was the end of it. (Though, I’ll come back to future considerations in a moment.)

Notably, before the CAAM statement, Tesla reportedly broke the agreement and some others followed. A day after the agreement was signed, Tesla started offering $500 referral bonuses on Model 3 and Model Y purchases, which was perceived by some at least as a breaking of the agreement. Then, joint ventures between Volkswagen and SAIC and FAW announced price cuts on ID models in China. So, yeah, price truce dead. Perhaps CAAM did conclude the agreement violated antitrust law. Or perhaps it was pushed to do something in response to those actions and wrote the letter.

So, Price War Or No Price War?

The problem remains: While EV sales have grown spectacularly in China and it is by far the biggest EV market in the world, often accounting for more than half of the world’s EV sales, production capacity and auto company growth plans are also enormous there. As production capacity grows, EV makers need to make and sell more EVs. As time marches on, companies need to hit their growth targets or suffer the results on the stock market or even in terms of basic corporate survival. On the other hand, if prices keep getting cut, automakers can’t make a profit on the cars they produce and sell anyway.

Also, I think a major issue that has arisen in China is that buyers wait for big price cuts. They’ve gotten a bit spoiled by market changes in recent years.

In any case, this is the dilemma: try to keep prices high enough and strive to make a profit, or cut prices just to keep sales up and bleed cash. I don’t see an easy solution there. In fact, I suspect we may see a tough period of time in the Chinese auto market as everyone tries to recalibrate expectations while doing their best to get by. Or maybe the Chinese government will make some big changes in the incentive structure again that floats everyone’s boats. Or maybe the concerns are overhyped and I’m too pessimistic. We’ll see.

But we’ve also got a few key notes from Reuters on this. “International automakers remain under intense pressure to restructure operations in China, and there are signs the pressure on consumer pricing is feeding back into worker furloughs and lower margins for suppliers,” the media agency writes.

“Some expansion plans are in limbo. Tesla is still awaiting approval for a plan to boost output at its Shanghai plant, its biggest, most productive factory. Some workers making battery packs at Tesla were notified of layoffs at the Shanghai plant last week, although production plans remain unchanged.

“Hyundai Motor (005380.KS), the world’s No. 3 global automaker by sales, said last month it would close a plant in China and look to sell it with a factory it shut last year.”

And Chinese automakers are increasingly looking to sell their EVs abroad. They weren’t doing so for years even while we in the West and South were begging for them. As long as they had enough consumer demand in China, why bother dealing with exports and foreign markets, after all? While we can all celebrate Chinese EVs finally getting pushed in volume to foreign markets, I think we can also assume that this is because the Chinese EV market is not growing fast enough to soak up Chinese EV production.

Stay tuned — many more chapters of this story are yet to come.

 

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