This report does not constitute a rating action.
The brutal price war in China's auto industry is obliterating profitability. This undermines R&D spending and puts supply chains at risk. Regulatory intervention offers some respite, but only industry consolidation can restore margins to sustainable levels.
What's Happening
Regulators are increasing scrutiny of the destructive price competition. The Ministry of Industry and Information Technology has declared it will curb "involution-style" competition. This term defies easy translation but it basically means excessive. The ministry's action came after the China Association of Automobile Manufacturers released an industry initiative in late May that urged carmakers to compete fairly and stop aggressive practices, such as selling vehicles below cost.
Why It Matters
A prolonged price war will further erode the sector's razor-thin profitability. The bruising competition has persisted since late 2022 as carmakers fight for market share. This cut the sector's profit-after-tax margin to 3.9% in the first quarter of this year from 4.3% in 2024, despite rising sales volume. Aside from industry leaders who can improve economies of scale, most makers will see margins shrink further this year.
Healthy margins are essential for long-term competitiveness. With the auto sector transitioning to electric mobility and autonomous driving, a healthy level of profit is essential to ensure continuous investment in research and development (R&D) and is crucial for competitiveness. Sustained low margins will cripple carmakers' ability to innovate. Moreover, sacrificing quality to cut costs could increase the risk of recalls and damage brand image.
The price war hurts supply chain resilience. Parts suppliers have to increasingly cut prices in this environment, or face losing business. Some have even accepted new orders at prices below cost, which inevitably risks quality as they try to spend less on production. They also need to tolerate longer cash conversion cycles; carmakers have been extending payable days in recent years to preserve cash amid declining profits. Shrinking margins and worsening cashflow will test the liquidity of smaller suppliers, endangering the stability of supply chains.
What Comes Next
Pricing conditions will remain unfavorable for the next 12 months. We believe greater regulatory supervision will prompt carmakers to avoid further material price cuts this year.
However, amid persistent oversupply, genuine pricing discipline will be difficult and margins will remain under pressure throughout the year. With affordability key to gaining and protecting market share, industry participants may engage in stealth competition to avoid government attention. This may include upgrading existing models with enhanced features while keeping prices unchanged, launching new models with lower prices than comparable vehicles, or by offering free maintenance and other benefits.
Industry consolidation is the only fix. Smaller carmakers and less competitive foreign brands will gradually exit the market as volumes shrink and liquidity worsens. We expect the top five players to increasingly leave competitors behind over the next three to five years, with their collective market share likely rising to about 70%-75%, from the current 56%.
Related Research
China's Car Sector: A Shakeout Looms, April 1, 2025
U.S. Tariffs Place Another Straw On The Back Of China Carmakers, May 15, 2025
| Primary Contact: | Claire Yuan, Hong Kong 852-2533-3542; Claire.Yuan@spglobal.com |
| Secondary Contacts: | Stephen Chan, Hong Kong 852-2532-8088; stephen.chan@spglobal.com |
| Danny Huang, Hong Kong 852-2532-8078; danny.huang@spglobal.com |
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