Profitability Pressure Intensifies in Chinese Auto Industry... Profit Margin Drops to 5%

The Chinese automobile industry has not been able to escape from deteriorating profitability due to price competition. The industry's operating profit margin, which was close to 9% until 2015, has fallen to around 5%.

On the 30th, China’s First Financial Daily cited the announcement from the China Passenger Car Association (CPCA), reporting that last year the automotive industry's operating profit margin recorded 5.0%, falling below the overall industry average profit margin of 5.8%. The industry's operating profit margin, which was 8.7% until 2015, declined to 8.3% in 2016, 7.8% in 2017, and 7.3% in 2018, then dropped further into the 6% range, reaching 5.7% in 2022.

[Image source= Xinhua News Agency]

According to Chinese financial market information provider Tonghuashun iFinD, among 20 automobile companies listed on the A-share market from the first to third quarters of last year, the net profit attributable to the parent companies of Dongfeng Motor, Guangzhou Automobile, Changan Automobile, and Shanghai Automotive decreased by 61.95%, 44.0%, 38.79%, and 9.8%, respectively.

First Financial Daily explained, "Most new energy vehicle companies are in a deficit state," adding, "The deficit amounts of some companies are increasing annually." Zhu Yidongshu, Secretary-General of CPCA, elaborated, "In recent years, the decline in profits in the automobile industry has been relatively significant," and "The pressure from deteriorating profitability in the industry is rapidly increasing."

The industry is seeking solutions through exports. Last year, China's automobile exports reached 5.22 million units, a 56% increase compared to the previous year, and the export value rose 69% to $101.6 billion (approximately 135.29 trillion KRW). First Financial Daily evaluated, "Generally, export prices are higher compared to the domestic market," and "The industry also earns higher profits from overseas business." It added, "In the era of high market growth, the industry's production capacity is in a serious state of oversupply," noting, "The operating rate was 63% as of the end of 2022, and an operating rate below 75% indicates severe excess capacity."

Jiang Yongwei, Secretary-General of the 'China Electric Vehicle 100 Club,' said, "Since January, the industry has been launching promotional policies, and price wars will continue this year," forecasting, "Industry restructuring will accelerate, and the situation will become even more difficult." Secretary Jiang predicted, "The industry will have to endure this situation for about 2 to 3 years, but next year China will produce world-class automobile companies."