Price war raging in China's auto market

HONG KONG, May 2 Reuters reports that a price war is raging in China's automobile market, one of the fastest growing in the world, as carmakers slash prices and launch new lines to challenge cheaper imports following Beijing's entry into the World Trade Organisation.

"The post-WTO membership auto market in China faces a great deal of consolidation and re-pricing," Morgan Stanley analysts Jerry Lou and Henry Ho said in a report seen on Thursday.

Imported automobiles are expected to gain 20 percent of the market in China this year versus 13 percent in 2001, mainland-backed brokerage ICEA said in a recent report.

Threatened by cheaper imports, many automakers in China, including Chinese joint ventures of General Motors, Volkswagen and compact car maker Tianjing Automotive Xiali, have recently cut their prices.

GM has rolled back the price of its Buick G2.5 sedan by 12 percent to about 258,000 yuan (US$31,160) while Volkswagen cut the price of its Passat by 6.5 percent to about 229,000 yuan, ICEA said.

Both models compete with Honda's popular Guangzhou Accord for a larger share of China's high-end car market.

Honda, Japan's second largest automaker, has vowed not to cut prices this year on cars it produces in a joint venture with China's Denway Motors. But Morgan Stanley said dealers were selling Accord 2.3-litre sedans for 290,000 yuan (US$35,000) versus its official price of 298,000.

Imports of Toyota Camry's are also giving Accord a run for its money, even though they cost more than 30 percent more. The Camry is expected to become an even bigger threat when Toyota begins to produce it in China in 2004.

The price cuts have helped to boost sales, but eroded profit margins, analysts said.

In the first quarter, domestically-made sedans and multi-purpose vehicle (MPV) sales rose 23 percent year-on-year, according to Morgan Stanley.

Analysts said automakers will have to make even deeper cuts to keep or boost market share.

"Prices have to come down further because car prices in China are expensive," said analyst Lawrence Ang at Deutsche Bank.

LOOMING OVERCAPACITY

Competition in China's fragmented automobile market has always been intense as more than 100 automakers fought for sales.

Aside from price wars, some firms simply copy designs of their counterparts, a main factor cited by Chinese truck maker Qingling Motors (1122.HK) for a slide in its 2001 earnings. Qingling is the Chinese partner of Japan's Isuzu Motors (7202.T), which is 49 percent owned by GM.

Competition is expected to grow even tougher in the next few years as Beijing cuts sky-high automobile tariffs and phases out import quotas as part of its WTO commitments.

Six of the 15 major sedan makers in China have already captured over 70 percent of the market, ICEA said, adding that smaller players will fail or be taken over by bigger ones such as GM, Volkswagen and Honda.

The Morgan Stanley analysts said they see "risk of serious overcapacity" in the sedan market, adding that "someone has to lose out".

Though sedan sales are forecast to grow by more than 12 percent annually between 2001 and 2005, ICEA said, capacity is also rising fast.

China's assembly lines can now churn out up to 700,000 sedans a year and new capacity of 100,000 sedans a year is coming on line, Morgan Stanley said. Less than 653,000 sedans were sold last year.

That has cast a shadow over the plan by Brilliance China, the country's largest minibus maker, to soon begin producing medium-priced sedans to be called Zhonghua.

Lawrence Ang is blunt: "I don't think Zhonghua can sell."

But Brilliance, which is headed by Yang Rong, ranked by Forbes as China's third richest businessman in 2001, appears to be ready to join the fray anyway.

As part of its expansion plans, it has signed a deal with Manganese Bronze (MNGS.L) to make London Black Cabs, and is also applying to set up a venture with BMW(BMWG.DE).

COMPETITIVE EDGE ON NEW MODELS DOESN'T LAST LONG

Some of China's auto giants are also colliding head-on with new models.

Honda and Denway's new Odyssey minivan -- a seven-seater which is seen as key to Denway's profit growth this year -- was challenged by their arch rival GM on its first day on the market last month.

GM, the largest maker of multi-purpose vehicles in China, launched a new version of the popular Buick GL8 to coincide with Odyssey's debut, and priced it at 298,000 yuan, the same as Odyssey, Morgan Stanley said.