THE unexpected sales dip in China's auto market has prompted car makers to join a new round of price wars across all market segments.

The return of the price wars has ended an upswing in car prices since the beginning of this year, triggered largely by soaring raw material costs.

Market observers yesterday said they remained skeptical about whether lowering prices would be helpful in spurring sales. The price reductions have also triggered market concerns the sustained growth of the whole industry could be damaged, which would further erode car makers' already declining profits.

FAW-Volkswagen, the flagship venture of Volkswagen AG in China, announced price cuts of 10,000 yuan (US$1,460) to 19,000 yuan on its mainstream models last Wednesday.

The price discounts covered the economy sedan Bora and Golf as well as Sagitar mid-class sedan and the Magotan.

The price cuts have been widely touted as the first shot in an impending price war among China's mainstream auto makers. It has also fanned market competition ahead of the prime sales season in September and October.

FAW-VW's price cuts have been followed by Chang'an Ford Mazda Automobile Co Ltd, which cut the price of its Mondeo mid-to-high class sedan by up to 20,000 yuan, or 12 percent, to enhance its competitiveness against rivals like Toyota's Camry and Honda's Accord.

Join the fray

Industry sources said more auto manufacturers are also considering price reductions.

'The high inventory and stockpile of spare parts were two main reasons behind FAW-VW's price reduction,' said Tong Jiren, an independent auto analyst. 'In the following months, more car makers are expected to join in the competition through an industrial-wide price reduction, especially in the economy car sector and profitable mid-class segment.'

Despite the intensified market competition, this round of price wars has been expected because of the slowed sales in the world's second largest auto market. Soaring fuel prices and record high inflation alongside a weak stock market have been blamed for cutting consumer purchasing power and denting market demand.

China's vehicle sales posted its first decline of this year in August when domestic car makers sold a combined 629,000 vehicles, representing a decrease of 6.34 percent from a year earlier, the China Association of Automobile Manufacturers said. Passenger car sales dropped 6.24 percent to 451,300 units while commercial vehicles fell 6.59 percent to 177,700 units during the same period.

For the first eight months of this year, vehicle sales maintained growth of 13.9 percent to 6.47 million units. But the growth was 11 percentage points slower than the same period last year.

The cooling market has sparked concern over its sustained development and many industrial analysts predicted whole-year sales may fail to meet projections of 10 million units.

Year-on-year sales growth is likely to slow to 6 to 8 percent after keeping up a double-digit increase over the past three years, the China Passenger Car Association said.

The majority of domestic car makers aggressively added capacity at the beginning of the year. But most of them failed to meet their half-year sales targets.

Different approach

Dealers said they were willing to offer lowered prices to boost sales when they were having financial difficulties under the tight monetary policy and lackluster vehicle sales.

But car makers said they faced difficulties in offering discounts because of the surge in raw materials prices.

A report from National Development and Reform Commission said a survey in 36 big cities found vehicle prices dipped an average 3 percent in the first half of the year from the same period last year.

The decline in vehicle prices is expected to continue in the second half of this year but at a slower pace because of the surging cost of raw materials and the expectation of a higher purchase tax would prevent car makers cutting vehicle prices too much, it added. 'The price war could have a limited impact on boosting sales now and instead it would be likely to raise a wait-and-see attitude among consumers,' said Jia Xinguang, the former chief analyst with the China National Automotive Industry Consulting and Development Corp.

Other analysts suggested car makers step up efforts to attract customers, on top of lowering prices.

'Price reduction used to be the most effective approach to stand out from the competition, but it will no longer be the main tool in China where profits in the auto industry are retreating,' said Rao Da, secretary general of the China Passenger Car Association.

'Instead, competition in technology, quality, marketing, brand, and service will emerge as the main channels to win the market,' he said.

The automotive and steel and plastics industries have all witnessed price surges in raw materials, with ore prices up 85 percent from last year, and oil prices skyrocketing to an unprecedented high.

Though the development of the market may have offset cost rises in purchasing, there has been almost no room for price reductions.