The Rise of Price Sensitivity in China
Chinese consumers have become increasingly price-sensitive, leading to a reduction in non-essential spending. This shift has forced carmakers to offer steep discounts and lower prices to remain competitive. In the fast-paced world of instant commerce, major players like Alibaba, JD.com, and Meituan are investing billions in subsidies to attract customers. While these deals can be tempting for consumers, the intense competition comes with hidden costs that affect various sectors of the economy.
Intensifying Price Wars
The fierce price wars in China are impacting industries ranging from cars to food deliveries and even solar panels. These battles are not only squeezing profits but also contributing to the country’s deflationary trend. Although consumers may benefit from ultra-cheap deals, the trade-offs are more complex than they appear. Since the pandemic and amid an ongoing housing slump, Chinese consumers have focused on value, cutting back on non-essential expenses. Carmakers have responded by offering significant discounts, often supported by government subsidies, deepening a long-standing price war.
In the instant commerce sector, companies are expanding delivery networks and offering substantial subsidies to entice customers with deals such as bubble tea for just a few cents. The appeal of these trends is evident, as seen in the case of Li Kun, a Beijing resident who was immediately drawn to new subsidies offered by XPeng, a Chinese electric vehicle maker. He expressed optimism about the competition, saying, “The harder the manufacturers compete, the better it is for the buyers.”
However, timing purchases can feel like a gamble if prices drop after a purchase. Yu Peng, a Beijing resident planning to upgrade his car, acknowledged this challenge. Despite the uncertainty, he accepted it with a Chinese saying: “Buy early, enjoy early.”
Hidden Costs of Competition
The cutthroat competition comes with hidden costs that extend beyond immediate savings. Some buyers in China have reported issues with safety and quality when automakers cut corners to maintain low prices. Recalls and assisted-driving features with low scores have raised concerns among consumers. Additionally, Beijing is worried that price wars could negatively impact wages, tax revenues, and the overall economy.
Recent weeks have seen increased criticism from China’s state media regarding these price wars. A recent commentary from Qiushi, a Chinese Communist Party publication, warned that the race to the bottom could force companies to slash essential production costs and compromise on quality, leading to “bad money driving out good” and ultimately harming consumer interests. The commentary also criticized some local governments for offering unfair incentives.
On Wednesday, China’s Cabinet pledged to regulate what it called “irrational” competition through stricter checks on costs and prices. The goal is to shift the focus from who offers the lowest price to who provides better technology and quality.
Market Share and Long-Term Strategies
Analysts suggest that maintaining market share remains a priority for many carmakers. With a saturated market and similar models available, companies that do not want to lose market share believe the only way to survive in the short term is to lower prices. Felipe Munoz, an automotive analyst at Jato, noted this perspective.
Jim Ma, sales manager at Chinese-Swedish carmaker Lynk & Co, emphasized that the company is not focused on short-term profits but on building long-term loyalty. Their new plug-in hybrid features a mini fridge, rotating seats, and an LED message strip. Ma highlighted that while the competition has made buyers more price-sensitive, many still value safety, customer support, or specific designs such as in-car entertainment for children.
“Our pricing policy is meant to make customers like and choose our brand,” said Ma. “In the long run, when they need after-sales services or decide to replace or buy a new car, we hope they’ll still choose us.”
Global Ripple Effects
The ripple effects of China’s pricing battles are being felt abroad in varied ways. Some consumers outside China welcome the shake-up that forces automakers globally to offer better products. Julia Poliscanova, senior director for vehicles at advocacy group Transport and Environment, noted that Chinese EVs helped fill the gap left by slow-moving European brands. While they aren’t as cheap in Europe as they are in China, their prices are often still slightly lower, or they offer better range or software at the same price.
Politics also play a role as Europe negotiates tariffs and minimum pricing on EVs with China. A key question is how to encourage Chinese car and battery makers to localize their supply chains in Europe to build up domestic industries—similar to how Japanese and Korean brands did decades ago. Efforts are already underway at some Chinese companies, particularly for Europe’s small-car market.
While consumers in Europe generally care more about quality than a carmaker’s origin, they also worry about broader economic impacts. They want to ensure that this does not result in, for example, their neighbor or someone in a nearby village losing their job. Ford and Volvo Cars are among the automakers cutting jobs in Europe in recent months, driven in part by growing competition with Chinese rivals.