Involution or evolution? China wants to stop the EV price war, but analysts are doubtful

BEIJING — As China's electric vehicle price war intensifies, its top leaders have sounded the alarm with high-profile calls to halt excessive competition, known colloquially as "neijuan" or involution.

While the buzzword has taken on various meanings in China to imply a race to the bottom, the term was mentioned in Chinese Premier Li Qiang's annual work report in March. The market regulator's meeting last month also called for "comprehensively rectifying 'involutionary' competition."

Earlier this week, senior executives of several Chinese EV makers were summoned to Beijing to "self-regulate," Bloomberg reported.

However, industry players and analysts have predicted that the competition will only increase.

"A certain automaker has taken the lead in launching significant price cuts and many companies have followed suit, triggering a new round of 'price war' panic," the China Association of Automobile Manufacturers said in a Chinese-language statement Saturday, translated by CNBC.

The government-linked body was taking shots at EV giant BYD, which sparked the latest round of discounts on May 23, including a more than 30% price cut on one of its car models.

"Disorderly 'price wars' intensify vicious competition," the association said, warning of further pressure on profit margins and consumer safety risks. It called for companies to abide by fair competition and not monopolize the market or "dump" goods at prices below the cost of production.

"'Price wars' have no winners, much less a future," People's Daily, the official newspaper of the ruling Chinese Communist Party, subsequently said in an article, citing the Ministry of Industry and Information Technology. That's according to a CNBC translation of the Chinese.

The ministry will increase regulation of non-productive competition and cooperate with other departments to enforce laws promoting fair competition, the report said.

The ministry did not immediately respond to a request for comment. BYD referred CNBC to its comment to China's state media, in which the automaker said it firmly supports the manufacturing association's calls for fair competition and creating a healthy market.

Analysts noted that BYD's latest markdowns are actually formalizing discounts that consumers would have likely received previously under China's trade-in subsidy program, which aimed to boost consumption.

Despite nearly a 30% market share, BYD faces competitive pressure as well, Nomura analysts pointed out in a report Monday.

The automaker, which counted Warren Buffett as an early investor, reported 14% growth in sales last month, a slowdown from 19% year-on-year growth in April.

"Given the current oversupply situation in the China auto market, we believe the most intense competitive phase is yet to come, until if we can see a meaningful market consolidation in the future," the Nomura analysts said.

Despite the rhetoric, there isn't much that can be done about market competition, Zhong Shi, an analyst with the China Automobile Dealers Association, said last week. He added that other countries are also watching the intense competition in China's car market and what it could mean for their local auto industries.

The average price of a car exported from China has fallen since 2023, reversing an upward trend previously, according to figures published on social media by the China Passenger Car Association's Secretary-General Cui Dongshu.

For China auto sales to Germany, the average export price per vehicle has fallen to $21,000 as of this year, down from $30,000 in 2023, the data showed. In Mexico, the top destination for Chinese car exports, was an exception, with the average price rising to $13,000, up from $12,000 two years ago.

In China, the average car retail price has fallen by around 19% over the past two years to around 165,000 yuan ($22,900), according to Nomura, citing industry data from Autohome Research Institute.

There are other signals that the rush into electric cars has created oversupply.

A "strange phenomenon" of secondhand cars being sold with zero mileage has emerged, Great Wall Motor Chairman Wei Jianjun said in a Sina Finance interview conducted in Mandarin on May 23. He added that around 3,000 to 4,000 vendors on Chinese used car platforms were selling such cars. Vehicles were registered as sales or deliveries for automakers, only to be sold on the secondhand market almost immediately, which inflated sales volumes. But this created "too much chaos", prompting Wei to call for better regulation within the industry.

China's fast-growing market of battery-only and hybrid-powered cars has seen several price cuts over the last two years.

The price war has yet to reach its peak, and "competition will become more intense in the next five years,“ EV startup 's CEO He Xiaopeng told Chinese media last week, which the company verified with CNBC.

"This is just an 'appetizer' of what is to come," he added. He said that rather than competing on price, Xpeng would compete on technology and expand beyond China to the rest of the world.

The startup has focused on making its driver-assist system a selling point and has delivered more than 30,000 cars a month for the past seven months. Last week, Xpeng released the Max version of its Mona 03 at 129,800 ($18,020), nearly 17% cheaper than when the lower-priced model was initially revealed in August.

Like most electric car startups, Xpeng reported losses attributable to shareholders in the first quarter of around $90 million. Nio, which has focused on more premium vehicles, on Tuesday reported a loss of $949.6 million in the first quarter.

However, Chinese smartphone company Xiaomi on Tuesday predicted its electric car business would turn a profit in the second half of the year, a company spokesperson confirmed to CNBC. The company entered the EV market last year with its SU7 sedan priced cheaper than Tesla's Model 3, and is expected to take on the Model Y with a YU7 SUV this summer.