Torrid price wars in China's car market have erupted recently as carmakers launch increasingly aggressive price incentive packages.
German automaker Volkswagen's joint venture with SAIC Motor Corp on March 15 slashed prices of the Santana and Santana 3000 mid-sized sedans, the Polo subcompact and the Touran multi-purpose vehicle by 2,800 to 11,000 yuan.
Another Volkswagen partnership, with First Automotive Works Corp (FAW) in Northeast China's Changchun, on March 7 lowered prices of the Jetta, Bora, Sagitar and Golf compacts by 3,000 to 21,000 yuan.
According to sales data last year, Shanghai Volkswagen ranked No 2 in China following US carmaker General Motors (GM)'s venture in Shanghai. FAW Volkswagen ranked No 3.
The GM venture on March 2 axed prices of its best-selling Buick Excelle compact sedan by as much as 10,000 yuan. The move came only two months after it cut prices of the Chevrolet Aveo and Lova subcompacts by almost 9,900 yuan.
Many smaller automakers or their dealers have also offered markdowns this year.
"Price cuts are mainly driven by mounting market competition with more new models being launched in China," says Hua Xue, chief executive officer of Cheshi.com.cn, a Beijing-based website for on-line vehicle sales and tracking car prices nationwide.
Strong incentives will cut prices in China's car market by 6 to 7 percent this year, Hua predicts, The figure is up from 5.6 percent last year.
Yale Zhang, director of Greater China Vehicle Forecasts for auto industry consultancy CSM Worldwide (Shanghai) Co Ltd, estimates that there will be around 52 all-new passenger car models, including sedans, sport utility vehicles and multi-purpose vehicles, entering the domestic market this year.
Shanghai Volkswagen will launch a Skoda Octavia compact sedan equipped with a 1.8-liter turbo FSI engine next month, designed to go head-to-head with early entrants such as the Honda Civic, Ford Focus and Mazda3.
FAW Volkswagen will start to sell a Magotan large sedan with a 2.0-liter turbo FSI engine in June, to contest Toyota's hot-selling Camry, the Honda Accord and the Buick LaCrosse.
These new products are likely to erode sales of older models.
Hua says price wars will break out in almost all segments from micro cars to large-sized sedans except premium models from BMW, Audi and Mercedes-Benz.
Li Hanchen, a sales manager of a Beijing-based PC maker, says he will postpone purchasing car until the second half of this year precisely because prices are declining.
The 32-year-old Li says he has decided to pick a compact sedan retailing between 120,000 and 150,000 yuan. "However, I hope prices for my target car will decrease by 5,000 to 10,000 yuan," he says.
In addition, growth in the passenger car market in the nation is widely expected to decelerate this year, which will also force manufacturers to cut prices to lure increasingly sophisticated buyers.
CSM's Zhang predicts the market will grow by almost a quarter to 5 million units this year.
The pace has slowed from its 30 percent growth posted last year.
Winfried Vahland, Volkswagen's China chief, has even made a very conservative estimate for market growth this year 7 to 12 percent.
From January to February, sales of China-made passenger cars grew by 31 percent to 786,500 units from the weak first two months of 2006, according to industry data.
Analysts also say carmakers' strenuous cost-cutting efforts in recent years have given room for them to slash prices and boost sales.
Volkswagen's China operations, Vahland says, cut costs by 20 percent last year from 2005 mainly through using more locally made parts and improving its production processes and management.
According to a goal announced in 2005, the German carmaker plans to cut China costs by 40 percent by 2008.
Vahland says Volkswagen plans to increase the use of locally made spare parts to 80 percent on average in 2008, up from 70 percent last year.
French carmaker PSA Peugeot Citroen's joint venture with Dongfeng Motor Corp, says it axed costs by 1 billion yuan last year.
The venture in Central China's Wuhan vows to cut costs by an additional 1 billion yuan this year.
Analysts say massive price cuts will bring down growth of manufacturers' profits this year from a sensational pace in 2006.
Zhang Xin, from Guotai & Jun'an Securities Co Ltd, predicts 2007 profits in the entire auto sector in China will grow by 20 percent from last year.
Last year, the sector's profits surged by 46 percent to 76.8 billion yuan.
Song Bingshen, from Citic China Securities Co Ltd, is more pessimistic. He estimates the sector will see a profit growth of only 15 percent this year.
