There has been a lot written and said about the impact of the new Chinese brands on the established players in Europe, and I have talked about it in my blogs in past. The primary focus has been on the competitive pricing, the technical leadership in BEVs and the level of technology included as standard in the cars with features like adaptive cruise control and lane keeping in even the cheapest cars. The pace of change is rapid, putting pressure on the established manufacturers to invest further to keep pace. The imposition of tariffs by the EU on BEVs will dent European profit margins, accelerate localisation plans and increase the focus on the UK market, but it will not stop the strategic advance of the new brands.
Some of the established brands are also being hit hard financially by much lower returns from the Chinese market through their joint ventures and direct export. Historically more than half the group profits for the premium brands have been decimated not only by the price war in China – a topic I will return to in a second – but also by changing consumer tastes, where a Benz is not longer seen as aspirational, and even an indication that you are not thinking rationally in your car purchase. Volkswagen has closed some of its joint venture factories, and certainly there is more to come.
The economic issue in the Chinese market is that there is intense competition as the market has plateaued, and there is excess manufacturing capacity from the ‘traditional’ Chinese manufacturers such as FAW, GAC and SAIC, their foreign joint ventures and new brands that have made a significant impact in the last few years such as BYD and more recently Xiaomi. This has led to intense competition in the marketplace with huge levels of stock push to dealers and massive discounts on prices that are already a fraction of those applied in Europe. A recent report from the Chinese Automobile Dealers Association (CADA) said that only 39% of all dealers operated at a profit in 2024 and that almost all were selling at below invoice price, 60% reporting discounts that put retail prices 15% or more below the wholesale price to them. One of the largest Chinese dealer groups was forced last July to delist from the Shanghai Stock Market after their shares traded below their face value for twenty consecutive days.
That is clearly not a sustainable situation, which is one of the reasons why we have seen a rush of Chinese brands into the European market. Previous export timeframes have been accelerated in order to access markets where they can make higher profits even with freight, tariffs and the need to launch new brands and build distribution networks. That will relieve some of the pressure at home, but it is still likely that there will be casualties amongst the Chinese brands both in the state-owned players and the newer start-ups who have less secure funding. Recent press reports suggest that two of the largest state-owned enterprises – Changan and Dongfeng – may merge, though as we all know from European experience, that does not automatically lead to enhanced competitiveness.
There have been casualties amongst dealers as well, and these are likely to continue even though CADA has a fairly strong track record of applying pressure through central government to get excessive stock pressure removed and in some cases, compensation paid to dealers by manufacturers. However, now that the practices are industry-wide, this is less likely to be possible, and in combination with a softer property market than when many of the large dealerships were built, continuing dealer bankruptcies and closures seem inevitable.
If we now come back to the European market, there is no reason to assume that the situation will be very different. The Chinese new entrants all have very high ambitions in terms of the sales volumes they want to achieve here, and the timeframe within which that might be achieved. They are building dealer networks with the many willing dealer investors across Europe, targeting similar dealer density in the case of most brands and markets to those of much longer established competitors. They are pricing very competitively at list, but then adding additional dealer and consumer incentives to drive volume. They are also targeting the fleet sector and business customers with attractive discounts and promotional deals.
There is clearly a medium term risk for the Chinese brands that deep discounts and high fleet sales affect residual values, so that a Dacia-style value pricing position, yielding above-average profits for manufacturers and dealers alike, is sacrificed in order to meet the demands to maximise sales volume in the short term. However, there is a broader issue that in order to maintain as much as possible of their market share and keep their factories running, the established manufacturers have to join this race to the bottom. That might sound like good news for consumers, but it will damage the ability of the established manufacturers to invest to improve their future competitiveness, and will affect dealers of all brands as they get forced into price-matching with fellow dealers and pre-registering stock to hit period-end targets.
The main takeaway from the arrival of the Chinese brands may not therefore be some fresh brands on our roads, attractive technology for customers and a jostling of position for market share amongst a larger number of brands in the market. The risk is that it leads to more disorderly markets with a much more intensive and short term battle for market share, with as many casualties on the dealer side as amongst manufacturers.