The second half of the auto market battle: Service, Quality, and Brand

Tesla is stirring up trouble again, and the price war seems endless. On August 11th, I discussed the price war in a live interview with China Central Television. "The price war has resumed, and it's unlikely to stop. We estimate it will continue until the end of the year. This is directly related to the intense internal competition, the overdrawn purchasing power from previous periods, and the lack of potential purchasing power in the broader environment." Sales data confirm this. From January to July, only a few companies, such as BYD, Changan, GAC, and Geely, met their production and sales plans. Most companies are still struggling with inventory. The price war will only take a short break before continuing, until new purchasing power is generated as cars go to the countryside and new energy infrastructure gradually arrives in rural areas. This will subside.

September and October are traditionally promotional seasons, and inventory that has suffered from power outages and rust in the summer must also be cleared. The next two months, until the end of the year, are the traditional sales surge period, when inventory pressures are at their peak. It's highly likely that the inventory coefficient (production + distribution) for the fourth quarter of this year will exceed 1.5. The automotive industry is a rapidly accelerating industry. Inventory is a risk all producers must face, and underlying it is capacity regulation. Whether you're a gasoline or electric car user, you can't escape it. Electric cars are even worse off. Gasoline cars can end up with dead batteries after a month of inventory, while electric cars can end up with no batteries at all. Inventory is currently high, and excess production capacity is also expanding. The most aggressive estimates put the national total production capacity at 40 million units. Compared to annual sales, there is at least 15 million units of excess capacity, most of which is new energy vehicle production capacity under construction. With such fierce price competition, such a homogeneous competitive landscape, and such uncertain consumer trends, there's no doubt that the Chinese auto market has entered its second half. I predict that the second half of the competition will be divided into three phases, each focused on three distinct themes. In the short term, product strength and marketing power will remain king, but the pursuit of innovation and speed will slow. As the industry chain destabilizes and product homogeneity increases, competition in after-sales service will rapidly become a priority. Efforts will be made to empower after-sales services, and the importance of after-sales services has been demonstrated in recent personnel changes at major companies like BYD. Strengthening after-sales service is crucial for improving customer satisfaction and building a strong brand moat through loyalty and satisfaction. In the medium term, improving reputation for quality can be tested in the used car market's depreciation rates and the recognition of product upgrades. Only products with outstanding quality, durability, and reliability (QDR) will be able to carve out a niche in the mid-term battle, winning larger orders and greater recognition. In the long term, building brand reputation will be crucial to success. The hype now is a tax to be paid later. Any marketing rhetoric will be stripped clean of its water in a long-term quality competition. What's revealed now may only be the surface, but what will be revealed in a few years may be the essence.

Analysts suggest that the second half of the auto market belongs overseas—there’s no need to dwell on the domestic price wars, but that couldn’t be further from the truth. The fiercely competitive domestic market has indeed prompted many automakers to turn their attention toward global expansion, aiming to alleviate pressure in China through external growth. In theory, this strategy could even help address the issue of overcapacity plaguing China’s new-energy vehicle industry. However, with price wars reigniting and the once-significant cost advantages fading, the primary selling point of going overseas—the ability to undercut competitors—has begun to lose its appeal. Perhaps most notably, today’s price battles have effectively tied all players back to the domestic market, where capital is absolutely essential to sustain such aggressive pricing strategies. That said, when it comes to profitability, Tesla still holds the financial strength to launch another round—or even multiple rounds—of price wars. After all, Tesla boasts a robust profit margin of 9%, whereas its rivals simply don’t have the same level of financial muscle. Meanwhile, while BYD has seen a significant surge in profits, its per-vehicle profit margin remains roughly half of Tesla’s, hovering around 5%. Even companies like Li Auto and XPeng are struggling, with negative profit margins across the board. Meanwhile, traditional giants like Toyota and Volkswagen manage only about 2% to 3% profit per vehicle—leaving hardly any company truly comfortable, except perhaps luxury brands such as Porsche and BMW. Reflecting on the past, one can’t help but recall how Volkswagen China launched its “Olympic” campaign in 2008, aiming to push per-vehicle profits up to 8% following the Beijing Olympics. Back then, China’s Automobile Industry Association reported that the nation’s average per-vehicle profit margin was already at 9%! From that industry-wide average 15 years ago to Tesla’s current dominance—with its enviable 9% margin—you can’t help but marvel at how much things have changed. Looking back at the recent collaboration between XPeng and Volkswagen, it becomes clear that XPeng is acutely aware of just how crucial those $700 million are to its ambitions. Ultimately, though, this partnership isn’t about a one-sided win or loss—it’s about mutual benefit, with each side leveraging the other’s strengths. Beyond the challenge of lacking sufficient funds to compete globally, automakers also face mounting obstacles in developed markets: the ongoing U.S.-China trade tensions, Europe’s anti-dumping and countervailing measures, and the looming threat of environmental border taxes. As a result, for Chinese automakers eyeing overseas expansion, the risks currently outweigh the opportunities.
First, the delivery speed advantage of Chinese-brand cars in 2022 faded in 2023. From 2020 to 2022, global electric vehicle supply chains faced severe disruptions due to the pandemic. As a result, while brands outside China typically required 12 to 16 months for delivery, Chinese brands could deliver their vehicles in just 4 to 6 months—or even faster. However, this year, the disparity in delivery times among brands has significantly narrowed, and the once-strong appeal of Chinese-brand EVs in terms of delivery speed has now diminished considerably.
Secondly, there’s Tesla once again. Tesla’s price war is unfolding on a global scale, as it has boosted its market share worldwide by adopting a strategy of slashing prices—particularly effective in the European market. Notably, in Norway, where hydropower resources are abundant and BEV penetration is highest, car prices overall have risen significantly since January 1 this year, thanks to a tariff hike imposed by the government on vehicles priced above 500,000 Norwegian kroner. This has pushed up costs for brands like BYD, Hongqi, and NIO. Yet paradoxically, because Tesla has lowered its prices below the new tariff threshold, it now enjoys a strong pricing advantage in the European market.
Third, traditional Western European countries like Germany and France still exhibit a certain level of loyalty toward local brands. Meanwhile, European consumers remain relatively unfamiliar with Chinese brands. On top of this, as European buyers are particularly drawn to cost-effective models—such as the Atto 3 (specifications | price inquiry)—the brand has yet to fully establish its marketing channels there. As a result, the challenge of further expanding into these markets is only expected to grow in the short term.
Overseas expansion isn’t working for now, but what if we return to the domestic market—would surviving the price war make us safe? Not necessarily. Automakers still face numerous challenges in the second half of the game, and some of these difficulties may even be quite unique. For instance, as new-energy vehicles have become the sole bright spot in China’s economy, this has objectively intensified the phenomenon of "involution" within the industry. Meanwhile, certain companies upstream and downstream in the new-energy sector are struggling financially and are on the brink of bankruptcy. Yet, local governments, pressured by economic realities, are forced to make policy concessions—though they’re unlikely to simply let their regional new-energy brands collapse. Moreover, China’s bankruptcy laws differ significantly from those in Europe and America, allowing some enterprises to remain artificially alive despite their financial woes, thereby holding back the pace of industrial upgrading and innovation. Meanwhile, to encourage the growth of private-sector tech firms, even as government policies on industry entry continue to tighten, there remains a strong possibility of creating exceptions. And once new players like Xiaomi and Didi enter the fray, it will inevitably further strain the already competitive allocation of market resources.
Various analyses and forecasts indicate that, at a time when domestic markets are experiencing intense involution and excess capacity has nowhere to go, blindly aiming to fully penetrate overseas markets could very well backfire. Meanwhile, amid the price-war mentality prevalent in the domestic market, companies are acutely feeling the pressures of soaring inventory levels, diluted talent resources, depleted consumer purchasing power, and an unstable economic foundation—along with the resulting challenges stemming from insufficient consumption potential. Therefore, it’s still best to return to the three stages and themes mentioned at the beginning of this article: diligently strengthening the three critical pillars of service, quality, and branding. Only by securing victory in the domestic market first can enterprises then confidently venture into the promising international "blue ocean" ahead.

Translated from Sina Auto

Email:
info@adtfm.com

Phone:
021-20532053

Address:
2nd Floor, No. 150 Jindian Road, Pudong New Area, Shanghai