• News
• 2024-07-15

Car Price Wars Drive Suppliers Crazy

Automobile manufacturing is the jewel in the crown of modern industry, and the supply chain involved in the production of a single car is extremely complex. Typically, assembling a car requires more than 1,000 major components, which come from up to 200 first-tier suppliers and countless second-tier suppliers. Any delay in supply from a single supplier can affect the production progress of the entire vehicle.

In the past two years, original equipment manufacturers (OEMs) with sales and cost advantages have taken the lead in lowering prices to secure their positions, driving back some new entrants in the car manufacturing industry, such as HiPhi Automotive. This has forced the remaining car companies to either participate in the internal competition or exit the market.

Regardless of whether they choose to compete or not, car manufacturers are striving to reduce costs. In addition to tightening their own belts, they also seek to create room for price reductions among hundreds of upstream suppliers. As car manufacturers engage in price wars, suppliers are also forced into the battlefield.

Chen Sheng has felt the brutality of this war of attrition, especially in 2024, when his company, as a supplier of electric drive systems for new energy vehicles, had to offer more competitive prices to retain major clients in the price war, ultimately selling at a loss. Behind the company's inability to make a profit, Chen Sheng's personal income has also been severely compressed. As a sales manager, his monthly salary was directly reduced to a base salary of 3,000 yuan.

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The price war among car manufacturers continues, and the upstream suppliers who foot the bill have already begun a round of reshuffling.

Price reductions and extended payment cycles

"No one can be sure when the car manufacturers will settle the payments."

Chen Sheng stated that, aside from a few leading companies, the payment cycles for the entire upstream supply chain in 2024 have been stretched to historic lengths due to the price war. Car manufacturers, mired in the quagmire of price wars, distribute pressure by delaying payments to upstream suppliers. Under "long payment periods," suppliers must bear various costs such as research and development, procurement, production, and mold expenses, which greatly tests the cash flow of upstream suppliers.

According to the payment model of the domestic automotive industry supply chain, suppliers must install components onto the vehicles before car manufacturers will begin to settle payments. Now, the repayment cycle for these funds is being stretched longer and longer. Car manufacturers mostly choose to settle through "banker's acceptance bills," which typically take about half a year before they are issued. After suppliers receive the banker's acceptance bills, it still takes time to settle with the bank.By the first half of 2024, the receivables of the company where Chen Sheng works increased by 25%.

Along with the extension of payment terms, price reductions also arrived. It was a long-standing convention in the industry to "negotiate prices once a year," but with the onset of price wars, mid-tier players, in order to snatch orders, even quoted the lowest price in history to "grab" major customers. Many automotive parts suppliers could only follow the market while negotiating pricing with their customers. Car manufacturers also began aggressively pressing for lower prices, even demanding suppliers to renegotiate prices every quarter, every month.

It can be said that non-top-tier automotive manufacturing upstream suppliers, due to a lack of bargaining power, have been pushed to the brink by major customers.

"If you don't lower your prices, other suppliers will approach your major customers and proactively reduce their prices. If you can't keep up, you're out." After obtaining orders from major customers, with the endorsement of leading car manufacturers, the sales department where Chen Sheng works also finds it easier to sell to other car manufacturers, and even helps the company to press for lower prices from upstream suppliers.

"Car manufacturers pressure us on pricing, and we in turn pressure our suppliers; this has become an unwritten rule throughout the automotive manufacturing industry." To shift their own financial pressures, Chen Sheng stated that the company would also further delay payments to suppliers at the next level. In the first half of the year, the company's accounts payable also increased by more than 30% compared to the same period in 2023.

As a veteran of the company, Chen Sheng finds it hard to imagine how quickly the turn of events has come.

From 2018 to 2020, it was the hottest phase of the new energy race, with the company where Chen Sheng works maintaining rapid growth at an annual rate of 90%, or even double the increase in sales volume. Due to the initial insufficient scale of the factory, some orders even had to be selectively abandoned. To expand production capacity, a new factory was built. After the production capacity increased, the sales department where Chen Sheng works expanded from tens of millions of yuan to hundreds of millions of yuan.

However, with the market's fervor, electric drive product technology is rapidly updated and replaced, and the race is becoming increasingly crowded. What's more critical is that the price wars of the past two years have turned the electric drive system market upside down. In order to enhance competitiveness, the company where Chen Sheng works could only repeatedly compress prices to secure orders from car manufacturers, becoming a second or third-tier supplier for car manufacturers. At the same time, under the pressure of rising raw material prices and high R&D expenditures, costs continue to increase, and losses are growing year by year.

By 2024, "finding money" has become the top priority for the company where Chen Sheng works.

Either get involved in the competition or get out.In order to survive, the company where Chen Sheng works has implemented a pay cut for all employees since June of this year. Managers have had their salaries reduced by 50%, and supervisors by 30%. As a sales manager, Chen Sheng's salary was cut in half the month after being verbally informed by the department head about the pay cut, returning to a base salary of 3,000 yuan.

The company cited cash flow issues as the reason, originally planning for a temporary pay cut with the intention of restoring the original salaries once the accounts receivable were collected in September. However, plans couldn't keep up with changes; not only did the salaries not get restored in September, but the company even began initiating layoffs.

Chen Sheng's business department was almost completely eliminated, leaving only three or four key members. To encourage technical staff to leave, the company even canceled non-compete agreements.

Now, in order to maintain normal operations, the company has mortgaged many of its assets on the books. To reduce rent expenses, the company's headquarters also moved from the core area of a first-tier city to outside the fourth ring road.

The electric drive system industry where Chen Sheng's company operates is highly competitive. On one hand, with the rapid increase in sales of supporting car models, car manufacturers have begun to build their own electric drive supply systems. BYD's Feidi Power, Huawei Digital Energy behind AITO, and NIO's Weilai Power are all representatives. On the other hand, power system integrators such as Bosch, relying on their accumulated advantages, have also begun to expand in the new energy field.

New energy passenger car terminal data statistics show that, with the addition of integrated technical solutions, the total number of electric drive systems equipped in the first half of 2024 exceeded 3 million, with a year-on-year increase of nearly 40%. Among them, Feidi Power, with a market share of nearly 25%, has become the market leader, Huawei Digital Energy has a market share of 11.3%, ranking second, and is rapidly increasing at a year-on-year growth rate of 500%. The top ten companies in the entire electric drive system market account for nearly 80% of the share.

This means that other companies at the lower end of the market only account for about 20% of the market share in total, and Chen Sheng's company can only struggle to survive within this 20% market share.

The current situation of Chen Sheng's company is not an isolated case. Previously, "Leopard Change" also reported that after Ideal Automobile's performance loss in the first quarter, it aggressively pressed down on the supply chain prices. If they didn't agree, it would re-bid. An Ideal supplier once said to "Leopard Change" that Ideal even planned to press the price below the cost line during the negotiation. After several rounds of negotiations, the price of parts was once again lowered, supplying Ideal at a price close to the cost line.

At the same time, as a large customer with a large purchase volume, Ideal has absolute say in front of most suppliers. For suppliers of a general scale, not accepting the price reduction would make the situation even more difficult. The cost of labor plus equipment depreciation would still result in a loss, but accepting the order at least allows the factory to operate.

In order to reduce procurement costs, BMW Group began to press down on the prices of one of its German suppliers in the first half of this year. Due to the too low quotes, the German supplier planned to give up the order, and BMW Group then talked to several other suppliers in batches. In the future, BMW may switch to a Chinese supplier for this part of the components. If the purchase volume meets the standard, BMW's costs may be reduced by nearly 1/3.Chen Sheng's company is suffering increasing losses. However, Chen Sheng believes that selling more and losing more might still offer a chance to turn things around, as long as they can survive and stay in the game, there is hope.

In Search of a New Evolutionary Theory

Due to the long-term involution in the new energy vehicle industry, the entire automotive industry has entered a phase where revenue increases but profits do not.

Data recently released by the China Passenger Car Association shows that in 2023, the automotive industry's revenue reached 10.1 trillion yuan, a year-on-year increase of 12%, but profits were only 508.63 billion yuan, with a profit margin of just 5.0%. From January to August of this year, the profit margin of the automotive industry fell below 5%, to 4.7%, lower than the average profit margin of downstream industrial enterprises, which is 6.2%.

From January to August of this year, price wars led to a total retail loss of 138 billion yuan in the new car market. Automakers exchanged price for volume, and the entire industry chain felt the pressure. Downstream automotive dealers generally face operating cash flow deficits and an increased risk of capital chain ruptures.

Suppliers upstream also face an industry reshuffling. Top companies in the supply chain have more say and are better equipped to deal with market price competition. However, suppliers in the middle and lower segments face increased operational pressure in an environment where automakers continuously lower the supply prices and extend the payment cycles for goods. Some suppliers even face the risk of bankruptcy, which in turn affects the stability of the entire automotive industry chain.

In August 2023, during the performance briefing of the semi-annual report, the power battery manufacturer Fuenergy Technology stated that there was significant pressure from downstream vehicle manufacturers regarding price fluctuations, and price pressure also emerged for battery manufacturers in the second half of the year. By the semi-annual report of 2024, Fuenergy Technology experienced a year-on-year revenue decline of 0.15%; the net profit attributable to the parent company was a loss of 190 million yuan, and the net profit excluding non-recurring gains and losses was a loss of 177 million yuan.

The company's financial report indicates that the current industry has an overcapacity, fierce price competition, and the gross profit margin of battery companies is being squeezed. If the price war among automakers further intensifies and the company's cost reduction does not meet expectations, it will bring the risk of a decline in the company's revenue and profits.

The two-year-long investment in the automotive price war has also left automakers feeling exhausted. Wei Jianjun, Chairman of Great Wall Motor, expressed doubts about the price war, "Unconventional cost reduction forces some manufacturers to cut corners, even to the point of fraud. Once a quality crisis is triggered, it is ultimately the consumers who pay the price."

Li Shufu, Chairman of Geely Holding Group, also believes that, "The more the price war is fought, the cheaper the prices become, the worse the quality, and the poorer the service experience, the more the enterprise will be ruined."China's new energy vehicles (NEVs) have the potential to overtake their competitors not only through the competitive breakthroughs of numerous car manufacturers but also due to the complex and comprehensive supply chain relationships that support them. The assembly process of a car involves many suppliers, manufacturers, logistics companies, and sellers. Only by maintaining close cooperation can every step from design to delivery be completed efficiently and accurately.

Now, at a critical period of deep industrial restructuring, simply reducing costs cannot lead to sustainability. How to transform supply chain management thinking and explore deeper collaborative cooperation between automakers and suppliers has become a new issue to break the deadlock.