It's no mystery what's driving this price battle: China's entry into the World Trade Organization. As it committed to do late last year, China in January slashed tariffs on imported cars from 70% to 80% to between 43% and 50%, depending on engine size. In addition, joint-venture manufacturers -- including GM, VW, Toyota, and Ford -- have begun releasing a selection of more affordable models that will appear over the next year or so. The result: China's consumers are demanding deals or delaying purchases while they wait for prices to fall further.
Jia Xinguang, a research fellow at the China Automotive Industry Research Institute, predicts car sales this year will rise by 15%, to a total of 900,000 vehicles, as prices go down. And as that happens, car manufacturers are grumbling about the "immaturity" of China's car market and consumers' "misconceptions."
BELOW COST? The gripe heard from both Chinese managers and the foreign heads of joint ventures goes like this: While many carmakers -- particularly the joint ventures -- have tried to maintain or even hike prices, smaller players are instigating price wars that the larger ones see as self-defeating and, ultimately, suicidal.
Some provincial manufacturers are selling their vehicles below cost, according to a number of foreign auto execs, who insist it can be only a matter of time before the upstarts go broke. The same execs say it's unreasonable for consumers to expect that China's WTO entry will lead to even deeper price cuts because tariffs will remain relatively high until 2006, when they're scheduled to settle at 25%. The present price war is "ludicrous," says the foreign head of one joint venture.
TAXES AND TOXINS. All this sounds like sour grapes to free marketers. The real issue, they say, is that some of the foreign manufacturers set up shop in a heavily protected market and are now having trouble dealing with the stirrings of real competition. "If one can't sell cars, that only proves the price is not reasonable," says Jia. "All the protective walls for the industry must now be removed."
It isn't as if China's car buyers haven't suffered in the past. For years, Beijing bureaucrats have limited auto sales and production by restricting manufacturing licenses and setting showroom prices. To the average consumer, that often meant unaffordable and outdated models. Worse, fees charged to the car buyer -- including taxes on everything from fuel to road usage and insurance -- have increased sticker prices by as much as 25%.
Of course, what looks to be a hands-down net benefit to the Chinese consumer won't come without a price. China's overburdened roads will see traffic snarls reach new levels, and the intense pollution that already fouls the air of larger cities can only get worse as more cars hit the streets. But for those prepared to ignore the fumes and gridlock, the current price war is the best news China's long-beleaguered drivers have had in quite some time. By Dexter Roberts in Beijing, with Alysha Webb in Shanghai