Beijing warned the practice of selling new cars with zero miles at a sharp discount in the used car market is just the latest example of “involution”, when domestic companies drag themselves down collectively in a race to the bottom.
China’s ruling Communist Party has warned domestic carmakers to stop using sales-boosting tricks—or risk triggering a vicious cycle that could drag down the entire industry.
On Tuesday, the CCP organ People’s Daily took on the practice of selling new cars as used on the cheap through so-called “zero mileage” discounting.
“This disguised form of price cutting disrupts normal market order and is a striking example of the auto industry’s ‘involution’,” the daily argued on Tuesday, according to a translation provided by Reuters.
Involution, or neijuan, is a buzzword that describes a pointless, resource-expending endeavor like spinning on a hamster wheel. But more recently it has come to refer to Beijing’s unhappiness its domestic champions weakening themselves by competing in a race to the bottom.
“Once market competition rules are properly enforced, ‘zero-mileage used cars’ wont be able to run far — or for long,” it continued.
Automakers risk conditioning consumers into expecting price cuts
Stuffing the sales channel full with nearly new cars at discounted prices is nothing unique to China. The industry has long maintained a practice called pre-registrations where dealers would offer discounted vehicles with extremely low or even symbolic mileage to offload slower moving stock and reach sales targets.
But China appears to have taken the practice to an extreme, ridding itself of this fig leaf of symbolic mileage amid a raging price war that is already halfway through its third year.
The primary culprit right now is BYD, the country’s largest carmaker, which has been slashing prices at a brutal rate, forcing other competitors to either follow suit or lose market share. Late last month it reduced prices across a number of the the starting price of its cheapest model, the Seagull EV hatchback, to the equivalent of $7,800 from nearly $10,000 previously. BYD could not be reached by Fortune for comment.
Typically once the industry conditions consumers to expect price cuts, it can create a vicious circle as buyers wait on the sidelines for better deals. Over time it becomes increasingly hard to wean them off discounts.
China can build twice as many cars as it can sell domestically
The price war results from years of overinvestment in the car industry, where privately owned companies such as BYD and Geely compete alongside industry newcomers like consumer electronics giant Xiaomi as well as a host of state-owned rivals.
The latter often see political interests promoted over market forces at the cost of profits. These include the central government’s First Automobile Works (FAW) and Dongfeng, as well as peers like Shanghai’s SAIC and Guangdong’s GAC that are controlled by their municipal or provincial party leaders.
With all these players jockeying for enough of a share to reach critical scale, China now has the estimated installed capacity across to build nearly 50 million cars a year, or twice as many as the industry can sell domestically. All these superfluous fixed costs put enormous pressure on carmakers to boost sales volumes at almost any price just to eke out an existence.
Last July, consultancy Alix Partners predicted a shake-out in the Chinese car industry currently featuring 137 electric vehicle brands. Only one out of every seven will be profitable by the end of the decade, it concluded.
This story was originally featured on Fortune.com
