BYD,China's largest new energy vehicle maker,would not have expected a letter demanding its suppliers cut prices,which it views as"common practice",would cause a market-wide stir and trigger louder calls for healthy development in the automotive sector.
In a strongly-worded letter dated on Nov 26,He Zhiqi,executive vice-president of BYD,demanded its suppliers slash their 2024 prices by 10 percent in 2025.
He said BYD's sales,which are soaring rapidly to hit new highs,are the result of technological innovation,economy of scale and low-cost supply chains.
As the competition in the auto market will be even fiercer in 2025,"to ensure BYD's competitive edge,we demand the whole supply chain to join hands and cut costs continuously.So we demand that you cut prices by 10 percent,"said He.
The letter,which was intended to be confidential,was nevertheless made public.
BYD's public relations chief,Li Yunfei,said on social media that it is"common practice"to negotiate new prices at the end of the year,but he was quick to add that price cuts are not mandatory but negotiable.
However,BYD's demand has already sparked protests from suppliers,some of whom expressed deep dissatisfaction with the pressure to further reduce prices.
In a letter of response,one unidentified supplier called BYD's request not only unfair but also damaging to the entire supply chain,according to Chinese media reports.
"This relentless drive to reduce costs is undermining the livelihoods of domestic suppliers and workers,leading to a vicious cycle where the only option is either to collapse under pressure or go out of business.
"This approach harms the entire industry and will ultimately undermine BYD's own long-term success,"said the supplier.
BYD is not alone.Also last week,SAIC Maxus asked its suppliers to collaborate on cost control efforts,with a target reduction of 10 percent,although in a much softer tone.
"Through close cooperation,we can develop more cost-efficient solutions,strengthen management,improve quality,enhance service and boost efficiency,while surviving the current pressure,"said SAIC Maxus in the letter.
Annual price negotiations are an industry norm,but usually at a rate of 3 to 5 percent,and carmakers will take into consideration suppliers'reasonable profitability.
However,the price war in China,started by Tesla and Citroen in early 2023 and driven further by BYD,has become relentless,engulfing almost all carmakers in the market and their suppliers.
Earlier this year,Bosch China President Xu Daquan said the average car price in China dropped by 15 percent in 2023.
"Major automakers have been engaged in price wars,and the pressure has been passed on to suppliers.Some car companies have even threatened that they won't make payments unless price reductions are agreed upon,"he said.
"Bosch will do its best to create room for price reductions for automakers,but the price war should not continue.If no one is making a profit,it will be difficult for businesses to grow."
GAC Chairman Zeng Qinghong,Great Wall Motor Chairman Wei Jianjun and Geely Chairman Li Shufu,as well as executives from global brands including BMW and Volkswagen have repeatedly expressed clear opposition to the cutthroat competition,calling for the sector's healthy development.
"We at Great Wall Motor are among the best in terms of cost control.If we are not making money,there is a problem.The issue is not only the business of the sector,but even the business of the country,"said Wei in an interview in August.
However,most of these carmakers have been ridiculed or even attacked verbally online,being told to shut up if they cannot offer discounts to car buyers as others do.
Industry data paints a worrying picture:in the first nine months of this year,China's automobile industry generated revenue of 7,359.3 billion yuan($1,017 billion),a year-on-year increase of 3 percent.
However,total profits stood at 336 billion yuan,down 1.2 percent year-on-year,with an industry profit margin of 4.6 percent,lower than the average profit margin of 6.1 percent for industrial enterprises.
"As production scales expand in the auto market and factory prices decline,the severe price wars in the market have intensified the overall pressure on automakers'profitability,"said Cui Dongshu,secretary-general of the China Passenger Car Association.
According to the China Automobile Dealers Association,the price war from January to August had resulted in a cumulative loss of 138 billion yuan in the new vehicle market,which it said has"significantly impacted the healthy development of the industry".
UBS's chief automotive analyst Paul Gong predicted that the price war would likely intensify by the first quarter of 2025,and potentially could be more intense than previous rounds of price cuts.
This could further compress margins for both automakers and suppliers,exacerbating tensions in the supply chain.
Industry observers warn that if this trend continues,the overall health of China's automotive sector could be jeopardized.
Also,suppliers,under financial pressure,may resort to practices such as reducing labor costs,lowering material standards and even cutting corners in production.
Some are reportedly working irregular hours—stopping during the day to cut electricity costs,and working at night to compensate for lost time.
Citing sources in the supply chain,the China Securities Journal said some automakers have even overlooked quality control to meet price and efficiency targets,leading to potential defects in vehicle safety and performance.
These cost-cutting measures are likely to negatively impact consumers,in the form of inferior products and potential safety risks,said analysts.
Some have called for a more balanced approach,urging automakers to take a longer-term view and ensure that the pressure on suppliers does not lead to the collapse of the domestic supply chain.
Without a sustainable and fair supply chain ecosystem,the industry risks undermining the very suppliers who help build the foundation of China's rapidly expanding automotive sector.
It will be essential for automakers to find a balance between competitive pricing and maintaining the quality of their vehicles,ensuring that the long-term health of the sector—and the car buyers it serves—are not sacrificed,analysts said.
Statistics from the China Association of Automobile Manufacturers show automobile production and sales reached 24.47 million and 24.62 million units respectively in the first 10 months this year,up 1.9 percent and 2.7 percent year-on-year.
（Picture: Veer）
