Although Volkswagen has denied the rumour of “general price hikes in April” for its passenger cars in China, speculations for car price increases in China are still rampant.
Mr Rao Da, Secretary-General of National Passenger Car Information Exchange Association, suggested that car price inflection points may appear this year or the next. Due to rising raw materials and labour costs, it is expected that cost per car may increase by 1500 to 3000 yuan (RMB:USD = 7:1) in 2008. Even for upgraded models, the cost would still increase due to the associated moulding, inspecting and machinery tools. But the fierce competition in China’s auto market has deterred most auto companies from unilateral price hikes.
Hidden price hikes
As apparent price increases may attract resentment from consumers, many manufacturers are now launching new models to obtain higher prices. And some upgraded models are also indirectly lifting prices by adding on extra accessories. An industry veteran revealed that many so-called annual upgraded models are essentially the same as the old models, with only a handful of extras, but much higher prices. In addition, many auto dealers are also promoting extra accessories to make extra profits.
One sales manager from a branded dealer shop revealed that in recent years, as the Chinese auto market is becoming more and more competitive, car prices have been on a downward trend. Therefore many automakers and dealers are trying every means to recoup the margins, with “compulsory add-ons” being the most notable one. Dealers are also manipulating some car buyers’ urgency to take delivery of the car, by encouraging them to purchase add-ons to speed up the delivery process. It is reported that margins on decorative accessories can be as high as 30-40%, and profits from selling decorative products for five cars are similar to selling one whole car.
Experts pointed out that even though most automakers are publicly saying that they can absorb the increased manufacturing costs, the tight margin of auto manufacturing has made them difficult to do so in the short term. As a result, in order to keep the margin stable, indirect price hikes could be the instant solution.
Price inflection point coming?
“As domestic steel price has increased 500 yuan per ton, cost of producing a medium size car should increase by 1000 yuan correspondingly. And higher labour costs in China will also push up producers’ costs. All these costs are not that easy to be absorbed by companies,” Mr Rao Da considered that as the world is now on an inflation path, China will not be immune.
Despite the bullish tune for car price hikes, there are also many sceptics. On one hand, due to the rising CPI, steel and oil prices, car manufacturing costs are going up, putting tremendous pressure on automakers in China. On the other hand, the continued declining price trend, technological advancement and market saturation have been reducing car prices again and again. Most consumers are already used to cheaper cars, a price hike is something next to unacceptable.
Many auto manufacturers are extremely cautious about price hikes, which could be a landmine for anyone. The passenger car market of China is now very competitive, but companies are still expanding their capacities. It is estimated that by 2010, annual car output capacity in China may reach 20 million units, almost doubling the estimated demand in the same period. This forecasted capacity surplus has placed doubts over the possibility of any price hikes.
Consumer voting with their feet
A consumer survey on “whether car prices will increase” revealed that 71.5% respondents didn’t think there would be any price hikes in 2008, against 13.5% saying “possible hikes”. Among the 3000 respondents, 65.3% said that car price hikes will definitely affect their purchase plans, against only 20% saying “not affected”.
Latest data from China Automobile Industry Association showed that despite car sales volume growth had slowed down from 25.3% in 2006 to 22% in 2007, profits had grown 65% in the same period. Total profits had exceeded 100 billion yuan, among which 61 billion yuan were contributed by the top 16 leading manufacturers. Profit growth for these leaders has exceeded their sales growth rates, indicating improved industry performance.
It is estimated that China’s car sales volume in 2008 will reach 10.28 million units, a 17% increase from last year. Albeit the rising steel and labour costs, profit growth for the Chinese auto industry is still expected to be 32% this year. But the world automotive history has shown that when a car market enters a mature stage, the whole industry’s profitability will inevitably decline. Against this backdrop, any plan to pass cost pressures to consumers is probably not feasible.
The survey also revealed that the reason why more than 34% consumers would not accept price hikes of their favourite car models is because there are alternative models for them to choose from. Even for those that can afford price hikes, 90% of them can tolerate a price increase of only 5% or less.
All signs are pointing to that for car price hikes, consumers will eventually vote with their feet.