Reckless drive: China’s carmakers should think twice before they export their price war to overseas markets

Annual revenues in the world’s largest car market are expected to decline for the first time since 2022, by 3% to 5%, according to Bloomberg Intelligence. When the country emerged after three years of pandemic controls, there were high hopes of economic recovery. That hasn’t happened. Consumers have been reeling from the impact of a real estate crash and prolonged job insecurity, especially among the younger generation.

To boost consumption, Beijing has been running a major subsidy programme since April 2024. Similar to America’s cash-for-clunkers plan, it encouraged people to trade in their old cars or scrap them altogether. More than 16 million autos, about one-third of the total sold, are believed to have been bought under this scheme.

Over the past year, several cities halted the 300 billion-yuan ($43 billion) initiative early, appearing to have run out of money. It’s unclear whether it will return. Even if the offer is renewed, the subsidy per car will probably be less generous. Combined with the introduction of a new 5% tax on electric vehicles (EVs) on 1 January, it’s sure to be a tough year for sales.

Carmakers have already been dealing with the fallout of a three-year price war. The consequences have reverberated throughout the supply chain and reduced the profitability of the entire ecosystem, including of parts makers. It was the right move for Beijing to step up regulatory scrutiny last week by announcing a proposal to crack down on selling vehicles below cost. However, more regulation will not be enough to fix China’s underlying problem of too much supply and not enough demand.

Car manufacturers have no choice but to seek greener pastures abroad, where the same car can be sold for more than double, even as they inevitably face rising barriers to entry in key offshore markets. In October 2024, Moscow raised import fees that severely affected sales. Until then, Russia was the biggest export destination for Chinese cars, a position that has been overtaken by Mexico. Thanks to low prices, Chinese vehicles might remain a viable option there, despite the Mexican government’s approval of 50% tariffs last week.

BYD, the world’s largest EV maker, has been China’s most aggressive exporter. In the first 11 months of the year, it sold more than 900,000 units overseas, an increase of 150% compared to the same period a year ago. At this rate, BYD will soon wrest the crown from Chery, which has held the position since 2003, and had a relatively paltry 15% gain.

Selling abroad at higher margins is BYD’s best bet for regaining profit growth. It fell in the two most-recent quarters as deliveries at home declined. Beijing’s crackdown on the company’s practice of delaying payments to suppliers as well as aggressive discounting has weighed on BYD’s earnings and market sentiment. Its share price has plummeted since touching a record high in May.

We got a sense of what’s to come in October, when BYD revealed a huge increase in its long-term borrowing to 61 billion yuan from just 5.5 billion yuan a quarter before. The money is likely to be used to fund its global expansion with factories in Hungary, Indonesia and Turkey scaling up production. The company recently opened a $1 billion facility, its biggest outside China, in the Brazilian state of Bahia.

Its peers are doing the same. Chery, which already has a European production base in Spain, is reportedly considering making vehicles in Germany and additional facilities in the UK. EV maker Zhejiang Leapmotor, a startup that partners with Stellantis on exports, plans to start small by selling 50,000 vehicles abroad this year and double that figure in 2026.

Localizing production helps avoid tariffs and establish long-term relationships in markets where automakers are trying to build up their brand image. But as expansion happens, history offers a cautious lesson on steep discounts squeezing margins. It’s disheartening to see a destructive pattern of price cuts happening in countries like Thailand. Authorities in Bangkok should take a page from Beijing’s playbook to stop unreasonable competition.

The pressures Chinese carmakers face will bring new investment opportunities and job creation in destination countries. But regulators must be on guard against replays of bad behaviour that could ultimately crush profits. ©Bloomberg

The author is a columnist for Bloomberg Opinion’s Asia team, covering corporate strategy and management in the region.