China’s had enough of its own toxic price wars

Shuli Ren, Bloomberg

China’s Politburo, its most powerful political body, recently pledged to boost consumer spending and curb “vicious competition” among businesses. This unusually direct statement reflects growing concerns over intense price wars across various sectors, from bubble teas and electric vehicles to generative AI. Companies are undercutting each other in a bid to attract a consumer base that has become increasingly thrifty amid a prolonged economic downturn. For example, EV maker BYD Co. has cut prices on more than 100 models this year, intensifying a price-cutting trend initiated by Tesla Inc. in late 2022. Manufacturers were offering an average discount of 8.6% in June, according to HSBC Holdings Plc.

Some companies have grown weary of this mentality. German luxury brand Bayerische Motoren Werke AG (BMW) has recently raised prices across its lineup and reduced revenue targets to alleviate sales pressure. This shift suggests that aggressive promotions are harming the premium segment’s profitability. Li Auto Inc., a major competitor to Tesla in China, sold a record 51,000 units in July, a 49.4% year-on-year increase, but reported an operating loss in the first quarter.

China’s biggest e-commerce companies are also reconsidering their strategies. After declaring victory in the midyear shopping festival with “10 billion yuan subsidy” programs, Bytedance Ltd. and Alibaba Group Holding Ltd. are adjusting their algorithms, which previously favored the lowest-priced sellers. Douyin, the mainland counterpart of TikTok, missed its internal target for gross merchandise value (GMV) partly due to promoting excessively cheap products.

This pervasive discount war is affecting smaller businesses and consumer behavior. Auto dealers, for instance, are reluctant to take inventory due to potential losses. Some Porsche dealers have objected to high sales targets, and China Grand Automobile Services Group Co. reported a first-half net loss of at least 583 million yuan ($82 million). The company’s share price fell below 1 yuan for 20 consecutive trading days by mid-July, triggering a forced delisting.

Small online merchants are also struggling. Big e-commerce platforms, emphasizing low prices, have adopted a “refund only” policy allowing shoppers to get refunds without returning products, leading to predatory behavior from those seeking freebies. Alibaba recently scrapped this feature for its most-valued sellers.

Beijing hopes that reviving consumer spending will boost the economy. The State Council has introduced new plans to encourage people to eat out, travel, and shop. For instance, those replacing conventional cars with EVs can receive a 20,000 yuan cash subsidy per vehicle, double the amount announced three months earlier. However, after a year of relentless discount wars, consumers may expect prices to continue dropping, making cash subsidies less enticing.

This deflationary consumer mindset is a significant challenge for policymakers at the Politburo. Businesses are eager for an end to this intense competition, but it’s uncertain if the worst is over, as some market leaders have benefited greatly. BYD’s price cuts significantly boosted its EV sales, with the company selling 426,000 units in the second quarter, nearing Tesla’s figures. BYD’s Chairman Wang Chuan-Fu stated that “competition is the rule of nature.”

The ball is now in Beijing’s court. President Xi Jinping has considerable power, and his urgent task is to encourage consumer spending. Regulators might label price cuts as dumping, but moving towards a command economy is a daunting prospect, even for Xi.

[Abridged]

Courtesy Shuli Ren/Bloomberg