Profit Control

Under Pressure From China, BMW Joins Daimler, VW to Cut Auto Parts Prices

BMW models at a Beijing auto show, April 2014. Source AFP
BMW models at a Beijing auto show, April 2014.
  • Why it matters

    Why it matters

    China’s competition authorities are calling on automakers to lower auto parts prices in China. German car makers are starting to cut parts prices and adjusting to a less profitable outlook.

  • Facts

    Facts

    • In 2014, 44 percent of all cars produced worldwide will be sold in China and the United States. Five years ago this figure was 35 percent.
    • The market for cars in China is growing three times as fast as in the United States.
    • Chinese competition authorities are clamping down on western firms selling expensive goods in China.
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    Audio

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For German auto makers, China once seemed like a source of endless profit. But this may be coming to an end as firms find they can no longer set their own rules.

China’s regulatory authorities are calling on foreing automakers doing business in the country to cut their prices for spare parts amid  regulatory scrutiny of into alleged  price-fixing by German and other foreign automakers.

The National Development and Reform Commission, the Chinese competition regulator, searched Mercedes-Benz’s offices in Shanghai last week as part of an investigation and another probe into Audi’s Chinese operations is underway.

BMW has responded by cutting the prices of its components by a fifth, the Bavarian automaker said.

“In the first half of August, the company will adjust prices for more than 2,000 further products, such as generators and batteries, by an average of 20%,” a BMW spokesperson said in a telephone interview.

BMW had already cut the prices of more than 3,300 spare parts in China by an average of 15 percent, according to the spokesperson. Prices for 108 components, such as engine and electronic parts, were reduced by between 20 and 50 percent, the spokesperson said.

China’s authorities have accused German car makers of price-fixing and gauging consumers. Previously, the market had been lightly regulated. But that changed in late 2011, when then Chinese government started to enforce laws it had previously been ignored to stop price-fixing.

BMW will also open more dealerships in Beijing, Shanghai and other larger Chinese cities to sell car parts to individual workshops to give customers more choice.

Before the antitrust probes began, German car companies were recording unprecedented profit margins, of up to 30 percent.

These helped BMW’s earnings grow more than expected in the second quarter.

Along with rivals Mercedes, Audi and Porsche, BMW has profited from the popularity of luxury cars in China.

Audi sold 317,000 cars in China during the first seven months of this year – more cars than it sold in all of 2011.

China’s authorities have accused German car makers of price-fixing and gauging consumers. Previously, the market had been lightly regulated. But that changed in late 2011, when then Chinese government started to enforce laws it had previously been ignored to stop price-fixing.

“We confirm that an investigation is underway and that we are supporting all investigations by the authorities,” a spokesperson at Audi told Handelsblatt.

These changes will mean the vast Chinese market will be less profitable going forward, experts say.

 

 

Automarkt China-01
New registrations of passenger cars in China during the first half year of 2014 compared to to the same period the year before. Source: Handelsblatt

 

“Compared to in Europe or North America, in China German auto makers had aimed for profit margins which were twice as high,” said Ferdinand Robert Schulhauser, an automotive expert and partner at the German consultant Graf Lambsdorff & Cie.

“Now, the gold-rush mood is clearly receding,” Mr. Schulhauser said.

“Profit margins are not extremely high anymore, but they are still good,” said another industry expert, who declined to be named.

But the market still has potential, so it is not surprising that carmakers have responded to the regulator’s calls by cutting prices, observers said.

“We have seen a slowdown in growth in the coastal regions, which is partly due to restrictions in car registrations in Beijing. In Beijing, for example, the degree of motorization is almost comparable to a city like Berlin. So we expect to see more moderate growth rates in those regions, depending on regulations and restrictions that affect the registration of new cars,” said Eric Heymann, analyst at Deutsche Bank research, specializing in the automotive industry.

“But the market is still very large and there are plenty of regions where there is still room for growth. Companies are starting to focus other regions within China,” Mr. Heymann said.

“Still, in the long run, the rate of economic growth is likely to flatten in six to eight years,” he added.

 

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