China’s car makers have been accused of many calumnies by European rivals and legislators, not least of taking vast amounts of state funding so as to build more cars, more cheaply.
The European Union took action last year when it introduced swingeing tariffs on the importation of Chinese-made electric cars, as there were fears that government subsidies were tilting the playing field too heavily in favour of Chinese car brands.
However, it has now come to light that Chinese car makers may not be so different from their western counterparts. According to a report from Reuters, China’s car brands are so desperate to keep their factories turning over that they’ve taken to shipping out brand-new cars as used models. These so-called ‘zero-mile’ used cars aren’t used at all, but are flogged off to exporters at heavily discounted rates.
In this, China’s car makers are effectively emulating what many American and European car makers did back in the late 1980s and early 1990s.
READ MORE
As the recession of that time, which followed the stock market crash of 1987, took hold many car makers began effectively dumping new cars at vastly discounted prices either through ‘preregistering’ – slapping a number plate on a brand-new car and selling it cheap as a dealer demo – or by selling as many cars as possible to hire car companies and other big fleet operators, again at vast discounts.
This King Canute-like policy was a short-sighted one, though for a while it staved off factory closures and lay-offs. However, it couldn’t do so indefinitely, and companies such as Volkswagen very nearly went to the wall before the economic recovery of the mid-1990s saved many people’s bacon.
Now, Chinese car makers are facing the same problems, albeit with different causes. China’s official government policy when it comes to car companies has been, for the past two decades, ruthlessly Darwinian.
The ruling Chinese Communist Party has encouraged the exponential growth of the country’s car industry, supporting the establishment of a bewildering phalanx of new brands and companies, but always with the overhanging threat that these companies will have to, eventually, stand on their own feet and simply outperform their competitors to survive.
While China’s car makers have been making a great success of taking on the European, Japanese, and American car industry grandees, now the bigger threat might be from other home-grown brands, and waning sales in the domestic market.
Industry analysts say these industrial pigeons are now looking for a roost. Even mighty BYD, one of China’s biggest car makers and a huge export success, has recently seen a dramatic fall-off in its sales growth figures, which almost flatlined in May.
While BYD’s global sales have risen some 39 per cent in the year to date, the company is apparently worried that EV sales are not rising as they should be, and is talking about cutting shifts, and maybe even mothballing factories, as it seeks to deal with fluctuating demand. Other sources have claimed that BYD’s output and outlook remain stable, but it remains to be seen if this is so.
What’s clouding the BYD sales figures, and those of other Chinese car makers, is the ‘zero miles’ phenomenon. According to Reuters, cars are coming out of the factories and are either being bought directly by exporters or purchased via a dealership, being swiftly registered and given a Chinese number plate, and then put straight on to a ship for export, with not a single kilometre added to the odometer.
These zero-mile sales make it incredibly difficult to judge just how well Chinese car makers are doing, as they may claim increased sales and higher export figures, but if a large percentage of those cars are heavily discounted zero-mile cars, then the profit margins these cars generate will be minimal at best. Reuters reckons that as many as 90 per cent of used car exports from China are currently zero-mile models.
The problem has been exacerbated by China’s car price wars. While these have sometimes been perceived as an attack on western car makers’ profits, there’s at least an equal pressure coming from the Chinese domestic market.
With all those newly-hatched car makers fighting for position in the market, there has been a savage round of price cuts – not least by BYD itself – as brands try to entice customers into showrooms.
That price war is a big driver of the zero-mile problem, as the car makers are desperate to shift stock at almost any cost. The zero-mile sales then make it very difficult to precisely assess the true health of what has become the biggest car market on Earth.
There’s an additional problem, in that while China’s central Communist Party government is against the whole concept of zero-mile used car exports, and there have been calls for tough regulatory action against them, China’s regional governments are all for them, and have been actively encouraging the practice as a way of hitting regional economic development targets, even to the point of giving exporting companies tax rebates.
What this means for the vast Chinese car industry remains to be seen. Similar practices in the European and American markets rattled and shook the foundations of major corporations, but while many tottered, few fell. It may be, however, that we are seeing the first cracks appearing in the Chinese car-making edifice.
