Dec. 15, 2016 6:29 a.m. ET
Selling cars in China appears easy these days given double-digit sales growth. But making money from all those cars is about to get a lot harder.
Two developments loom large. China’s Ministry of Finance said Thursday it would trim a temporary purchase-tax cut on small-engine cars next year, raising the rate from 5% to 7.5%, still below the normal 10% level. Second, Beijing is clamping down again on foreign car makers’ business practices. State-backed media reported this week that investigators were looking into an unnamed U.S. car maker’s price setting behavior. General Motors and Ford both have profitable China operations.
Across China, sales volumes have been on a tear, yet average selling prices have been edging lower, down almost 2% between June and October, according to data from the National Development and Reform Commission’s Price Monitoring Center. It was only a matter of time before the world’s largest car market was inundated with too many cars. Excess capacity accounted for 54% of production in 2015.
So far, margins have largely held up. That looks set to change. Car makers should see higher marketing and selling expenses as they lure customers and offset the phasing out of the tax cut. Higher steel prices and stringent fuel efficiency requirements should hit the cost side.
Both Ford and GM have warned that pricing pressure is increasing. GM has kept net income margins at its China joint ventures relatively stable over the past few years, averaging 9.6% since 2013. In the third quarter, even as GM’s sales rose 9%, margins fell to 8.7%.
The investigation into pricing policies represents another weight. It could result in fines, as a probe into parts price fixing did for many makers in 2014. More important, it could be a signal of a time-honored tradition in China where companies, especially foreign ones, get a brushback when profits get too large.
The math is only going to get tougher in China’s car market.
Write to Anjani Trivedi at [email protected]