China's Automotive Market: Rising Average Prices Amidst Price Wars

China’s automotive market has witnessed a curious phenomenon in recent years - the average price of vehicles has steadily increased despite intense price competition among manufacturers. According to data from the China Passenger Car Association, the average price of domestic vehicles was 15.1 million yuan in 2019, 16.2 million yuan in 2020, and reached 18.2 million yuan in 2023. From 2019 to the present, the average price has risen by 3.1 million yuan.

This trend seems counterintuitive given the prevalence of price wars in the market. In the first nine months of 2023 alone, there were 195 models that reduced prices, exceeding the scale of 150 models in the entire year of 2022 and 95 models in 2021. So why are car prices still “rising as they fall”?

Zeng Dongshu, secretary-general of the China Passenger Car Market Information Joint Conference, explains that the key factor influencing the change in average retail prices is the shift in sales volume structure across price ranges. In recent years, the proportion of high-end models has increased significantly, while the proportion of low and mid-range models has decreased. This is driven by both consumption upgrades and the purchasing behavior of replacement buyers.

The rise of new energy vehicles (NEVs) has played a significant role in this shift. NEVs have quickly gained popularity due to their long-term cost-effectiveness and favorable government policies. The purchase tax exemption for NEVs directly impacts their price elasticity, making them more competitive and stimulating demand growth. As the penetration rate of domestic vehicles surpasses 50% and continues to grow, the bargaining power of leading brands like BYD has increased, further reducing price elasticity.

Moreover, NEVs offer lower usage costs, particularly in terms of energy and maintenance. This reduces the marginal cost for consumers, making long-term ownership more economical. When making purchasing decisions, consumers consider not only the initial cost but also the total cost of ownership, including purchase, energy, maintenance, and depreciation. NEVs' lower total cost of ownership has enhanced their market appeal.

Government policies, such as purchase tax exemptions and subsidies, have also influenced the market by correcting market failures. These policies have lowered the cost of purchasing NEVs, promoting environmentally-friendly consumption. The competitive structure of the NEV market, with more manufacturers entering and driving technological progress, has further reduced costs.

In conclusion, the simultaneous increase in vehicle prices and sales is a reflection of consumption upgrades driven by China’s economic development. Despite a slowdown in economic growth, the rising disposable income of Chinese consumers aligns with the increase in average car prices. The popularity of NEVs, supported by their cost-effectiveness, technological advancements, and favorable policies, has been a major contributor to this trend. As domestic brands continue to move upmarket and competition intensifies, this phenomenon is expected to become even more pronounced in the future.