China's Car Sales Fell for the First Time in 30 Years. What Are Automakers Doing to Save Themselves? | Reporting From the 2019 Shanghai Auto Show

Compact electric SUVs were everywhere at this year's show. With the market cooling, automakers are fighting for the hottest spot in ever-narrower segments.

At 7 a.m. on April 16, Wang Jing, a sales consultant who normally works at a General Motors Buick dealership, and three colleagues had already come in from their homes in downtown Shanghai to the National Exhibition and Convention Center on the city's western edge. It was the first media day of the Shanghai Auto Show, and they had been told to be in place before 7.

Sales consultants usually don't turn up until the second day, because the first two days belong to the press and the industry. On day one, from 9 a.m. on, automakers are busy holding news conferences, pitching new products and new plans to reporters.

This year was different. The order to send sales staff in early came straight from SAIC-GM. Dealerships in Shanghai and nearby cities got similar instructions, and their staff went through half a day to a full day of sales training first.

Almost every automaker made the same arrangement. Only a few brands, Honda, Toyota and Audi among them, did not.

"I worked the 2017 show. Back then you basically had to pay over sticker for the cars that sold well," said Mr. Tao, a salesman at SAIC Volkswagen's Yixianlu dealership. "The pressure this time is on a completely different level. Once the public days open on the 18th, our dealership is going to work every customer hard." Volkswagen had put heavy sales targets on its dealers, and with the market in a slump, the only way to hit them was to cut into their own margins.

Counting the Skoda brand, SAIC Volkswagen sold 2.065 million cars last year, more than anyone else in China. Its sales grew 0.1%.

The problem facing the Chinese car market as a whole is bigger. Last year, China's car sales went into reverse for the first time in 30 years. The China Passenger Car Association said sales fell 5.8% in 2018 from the year before. In the first three months of this year the drop widened to 10.5%.

The response is getting clearer: cut production, spend more on subsidies at the retail end, and launch new models. Cars are not like phones or other consumer goods that change every year. A model usually gets a major overhaul of exterior, interior and powertrain only once every seven years, with two or three smaller tweaks to styling and features in between. A weak market is forcing automakers to change that.

Figures from the auto data provider Wilson show that of the 595 new vehicles put on sale in 2018, all-new models made up 24.1% and new variants 32.2%, both higher than the year before. Volkswagen's two China joint ventures alone launched five new SUVs.

Held every two years, the Shanghai show is one of the main windows for launching cars and running marketing pushes all at once. This year's is also the first since the Chinese market began shrinking, and no automaker wants to slight a market that generates 3.12 trillion yuan a year. The market, in turn, is watching how they answer the decline.

New launches are up 50% from the last Shanghai show, and nearly 90% are SUVs or EVs

Autohome counts close to 240 new models at this year's Shanghai show, 20% more than last year's Beijing show and 50% more than the Shanghai show two years ago. Beijing and Shanghai take turns hosting in alternate years.

By our rough count on the floor, more than 90% of the new models carried the label "electric" or "SUV."

Automakers are widening their lineups fast, adding ever more finely sliced models, from long-wheelbase sedans to compact SUVs, while putting batteries into as many existing cars as they can, hoping to lift sales before subsidies for new-energy vehicles are cut again. Bloomberg said "electricity is in the air."

Two days before the show opened, Volkswagen Group held an "SUV Night" and unveiled, in one go, two production cars — the FAW-Volkswagen T-Roc R-Line and the SAIC Volkswagen Teramont X, aimed at the compact and mid-to-large SUV segments — plus three concepts: the SMV Concept, the SUV Coupe Concept and the ID.ROOMZZ.

The SMV Concept and the SUV Coupe Concept will eventually reach showrooms under FAW-Volkswagen.

Until 2016, Volkswagen in China effectively had just two SUVs: the SAIC Volkswagen Tiguan and the imported Touareg. When the Tiguan L arrived in 2017, the old Tiguan stayed in production, which gave Volkswagen three.

Both domestically built Tiguans started at around 200,000 yuan and the Touareg at 560,000. That left Volkswagen with no advantage at all in the SUV segment, which accounts for 40% of passenger car sales in China. Data published by Anluqin, a research firm contracted to the China Passenger Car Association, show that Chinese SUVs have sold for around 140,000 yuan for years — the mainstream price band for joint-venture small SUVs and domestic SUVs.

So Volkswagen rolled out one after another in 2018: the SAIC Volkswagen T-Cross from 127,900 yuan, the SAIC Volkswagen Tharu from 169,800 yuan and the FAW-Volkswagen T-Roc from 139,800 yuan. It also promised 12 SUV models by 2020 and 30 by 2025.

China Business News reported last November that Stephan Wöllenstein, Volkswagen's China CEO, said the company would shift toward SUVs until they made up half its lineup by 2025.

Ford, struggling, used the Shanghai show to unveil the Ford-brand midsize SUV Escape and the Lincoln-brand large SUV Aviator.

Ford Motor's China sales dropped 36.9% in 2018, and sales at Changan Ford, its core business unit, collapsed 49%. This year the fall has deepened: Changan Ford was down 81.4% in February from a year earlier. Its plan for turning that around is to launch cars in quick succession and adapt them specifically for China.

Ford China has made a habit in recent years of announcing one ambitious plan after another.

In 2017 it published a five-to-ten-year electric vehicle plan, saying that by 2025, 70% of Ford-brand models sold in China would offer an electric version. At the end of that year it announced its China 2025 plan: more than 50 new models in China by the end of 2025, including eight all-new SUVs and at least 15 electrified Ford and Lincoln models.

At the "Ford China 2.0" event on April 3, Ford China president Chen Anning promised more than 30 new models in China within three years, a third of them electrified.

General Motors, meanwhile, refreshed all three of its brands here. Chevrolet showed the compact SUV Trax, Buick the small SUV Encore and Cadillac the large SUV XT6.

The mid-to-high-end and luxury brands each brought a new SUV or an EV as well. Audi launched the all-new Q3 and the battery-electric Q2L e-tron. BMW showed the more powerful X3 M and X4 M, plus the seven-seat flagship SUV X7. Mercedes-Benz brought the battery-electric EQC, announced at the start of the year, and unveiled a seven-seat SUV concept, the Concept GLB.

Domestic brands' new models were essentially all electric SUVs: BAIC New Energy's EX3, BYD's S2 and Han, Dongfeng Forthing's T1 EV, GAC Trumpchi's Aion. The wave of companies built on Chinese capital — Leapmotor, Chehejia, NIO, WM Motor and others — turned out in force too, booking up more than half of one hall at considerable expense. Tesla was far quieter. As at last year's Beijing show, it launched nothing, and its booth, a quarter the size of its rivals', held two Model 3s, a Model S and a Model X.

Meanwhile the segments keep getting finer, to give people a reason to sign

By convention, carmakers widen their lineups when cars sell well, trying to make money while the boom lasts. When sales are bad, they cut brands and models to save money.

2018 went the other way. Wilson puts that down to two things. One is that 2018 happened to be the year most models came up for replacement.

The other is that even as total sales fell, cumulative full-year sales of cars with engines of 1.6 liters or less — mostly what people call A-class, or compact, cars — rose 2.86%, which pushed the big manufacturers to put new products into that segment to hold or widen their share. Wilson's data show 110 new models launched in A-class, the largest segment, slightly more than in previous years.

Break it down further and there were plenty of new A-class cars across sedans, SUVs and MPVs. In MPVs alone there were at least the BYD Song MAX, the Changan Oshan A800, the GAC Trumpchi GM6 and the Geely Jiaji. Among SUVs, the Volkswagen T-Cross, the GAC Toyota ix4 and the GAC Mitsubishi Outlander plug-in hybrid.

New compact SUVs were more numerous still. Volkswagen Group's Volkswagen and Skoda brands launched three in a row at last year's Guangzhou show; Dongfeng Renault, SAIC-GM, GAC Toyota and FAW Mazda each brought one of their own. Domestic brands led the charge: the SAIC-GM Baojun RS-5, the FAW Besturn T77 and the JAC Refine S4 all appeared at that Guangzhou show.

Mid-to-high-end and luxury brands were busy pushing into compact SUVs too. The Jaguar E-Pace and the Cadillac XT4 arrived one after the other, and Lexus brought out the UX in January. Over 2018 the number of compact SUVs on sale in China went from 97 to 118. Cars launched at this year's Shanghai show, such as the Volvo XC40 and the Audi Q2L e-tron and Q3, belong to the same category.

Figures compiled by Tong Jiren Auto Review put China's compact SUV sales at 5.31 million in 2018, or 53.3% of the SUV market — up 1.2 percentage points on 2017, and the only SUV segment to gain share.

Volkswagen and BMW take another approach: stretch a compact SUV so it can challenge the class above while still counting as A-class. The wheelbases of the new Tiguan L and the BMW X1 now rival those of their brands' mid-to-high-end and even flagship SUVs, and the cars are longer and wider outside as well. Dealer sales pitches call this "a class above."

"Consumer tastes change too fast, and demand tends to come in very small pieces," the head of an engine parts maker told us by phone. His company supplies raw materials directly to Volkswagen's two China joint ventures and to SAIC-GM. "When cars sold well, the automakers didn't pay much attention to any of this. How many years did Volkswagen's domestic SUV business ride on the Tiguan alone? FAW-Volkswagen had no SUV at all before 2018, and last year it launched three. When cars don't sell, you have to feel your way into different segments bit by bit."

He also mentioned that custom-configuration orders, once something only luxury brands offered, started showing up last year in the B-class market around 200,000 yuan.

It is not hard to see why companies under sales pressure make these moves. Luxury brands mostly entered China's SUV market from above 500,000 yuan, far above the roughly 150,000-yuan average price of a new car sold here. As overall sales split apart, and buyers of a brand's expensive models can no longer make up for the slide in its cheaper ones, cutting prices and moving into a lower, cheaper segment becomes one way out.

Luxury brands, which still grew last year, begin pushing prices down

The joint-venture brands' new cars this year run to smaller engines, lower fuel consumption and lower prices. Nissan's best seller of 2018, the Sylphy, carries a naturally aspirated 1.6-liter engine and, after discounts, sells for less than 100,000 yuan. GAC Toyota's all-new Levin uses a 1.2T engine and burns 5.5 liters per 100 kilometers. Volkswagen has pushed its prices down toward the 120,000-yuan line and launched a separate sub-brand, Jetta, whose first SUV, the VS5, goes on sale soon.

Yu Haikun, a senior auto analyst at CSC Financial, reads it this way: joint-venture brands are using low-displacement, low-power, fuel-saving replacement models to push below 100,000 yuan, while domestic brands are showing off high-end flagships to fight for the 100,000-to-200,000-yuan market. The two will overlap more and more, and the contest will still be decided by how good the product is and how much car you get for the money.

Above 200,000 yuan, meanwhile, the luxury brands — BMW, Mercedes-Benz, Audi — are competing with mid-tier brands such as Volkswagen, Buick, Honda and Toyota by launching cheaper models and offering discounts at the dealership.

A tracking report from the Zheshang Securities Research Institute shows that in December alone, German passenger brands — SAIC Volkswagen, FAW-Volkswagen, FAW-Volkswagen Audi, Beijing Benz, Fujian Benz and Brilliance BMW — had a weighted average list price of 239,800 yuan and an average transaction price of 204,700 yuan. Both have been sliding since the start of 2018, mostly because the three big luxury makers are pushing prices down.

Dealer data and owner-reported pickup prices collected by Autohome show that luxury cars listed at around 300,000 yuan — the Infiniti Q50, the BMW 320, the low-power Audi A4 2.0T — can go for as little as 250,000 before extras. The 316, the cheapest trim of the BMW 3 Series, has already fallen into the 200,000s.

With EV subsidies shrinking, domestic brands are raising prices

Domestic brands had built large numbers of micro and subcompact cars below that range threshold. China Passenger Car Association data show China sold 759,700 battery electric cars in 2018, half of them compact and A0-class models, roughly where the Tiguan and the T-Roc sit. The Wall Street Journal wrote that these companies now have to work out how to make money once the subsidies stop.

On March 26 the National Development and Reform Commission cut the new-energy vehicle subsidy at every range tier. The top tier now works out to 25,000 yuan, down sharply from the original 66,000. Battery electric cars with a range under 250 kilometers get no cash subsidy at all.

GAC's answer is scale. It is building a $6.7 billion production line in Guangzhou meant to turn out 100,000 electric cars a year and spread the cost. The trouble is that battery prices, which account for close to a third of an electric car's cost, have already flattened out and may be hard to push much lower soon.

The more popular answer is to raise prices. Domestic brands are launching pricier, higher-end electric models to offset the shrinking subsidy and protect their margins.

According to CSC Financial's research department, Geely spun its new-energy business into a separate brand and launched the Geometry A, whose 500-kilometer version costs 170,000 yuan after subsidy. The long-range version of GAC New Energy's Aion S costs 160,000 after subsidy. BYD's new SUV, the electric Song Pro, starts at 150,000 after subsidy.

The market is now trading rumors that Chinese regulators are considering loosening car purchase limits in several cities. Caixin reported that the NDRC has told local governments not to restrict the driving or purchase of new-energy vehicles, and to scrap any such rules already in force. Sina Finance said "license-plate quotas in restricted cities are expanding sharply — Beijing's will double, with almost all of the increase going to new-energy vehicles." Earlier there were reports of a rural car-buying push that would waive the purchase tax for buyers in the countryside.

Patrick Yuan, an auto analyst at the investment bank Jefferies in Hong Kong, wrote in a note to QDaily that this would release pent-up demand in Beijing, Shanghai, Guangzhou and Shenzhen. "Take Shanghai: at the end of 2017, 5.5 million households owned 2 million cars, a one-car-per-household rate of 36%, far below developed countries with the same per capita GDP."

Still, as Bao Ye, head of Buick marketing at SAIC-GM, told Caixin during the show, much of the new-energy market today is a policy market and a license-plate market: people buy these cars because the restrictions leave them no choice.

The show is still mostly a place to sell cars, and salespeople are told to "serve every buyer"

In theory China is nowhere near its ceiling. Figures compiled by Southwest Securities show China's real GDP per person was about $9,000 in 2018, close to where the United States stood in the 1940s in real terms, before inflation adjustment. Yet China had about 167 cars per thousand people, well under the 246 per thousand the United States had then.

Analysts see several forces at work at once: people bought early, or cannot afford to buy, or dare not. In 2009 China cut the purchase tax on cars with engines of 1.6 liters or less, and sales of those models grew nearly 80% over the following year. Seven or eight years later, when those cars were due for replacement, China cut the purchase tax again in 2016 — pulling future demand forward a second time.

Consumer auto finance poured fuel on the fire. Auto loan ABS issuance jumped from 7.795 billion yuan in 2014 to 99.3 billion in 2017. Counting credit-card borrowing as well, CICC estimates that at least 500 billion yuan of credit flowed into the car market in 2017.

The slowdown that followed in 2018 pushed down the price of one asset class after another and shrank household wealth, which made people more careful about their future cash flow and left demand for cars relatively thin.

In its 2018 annual report, GAC Group said that industry conditions, industrial policy and the wider economy together had slowed the growth of car demand. On top of that, Beijing, Tianjin, Guangzhou, Shenzhen, Hangzhou, Shandong and other places announced they would adopt the stricter China VI emissions standard early, putting heavy pressure on companies trying to clear China V stock. Industry forecasts for 2019 point to zero growth or worse.

This is the whole industry's problem. German, American and Korean brands all sold fewer cars in China in 2018 than in 2017. SUVs, which had driven the market's fast growth for years, were the first to fall: their sales growth turned negative last August, the first decline in nine years.

Plenty of brands still say in public that the Chinese market will bounce back. Jürgen Stackmann, Volkswagen's global sales chief, is one. BMW's chief financial officer, Nicolas Peter, expects Chinese sales to grow 5% to 10% this year. Makoto Uchida, who runs Nissan's Chinese joint venture, thinks a recovery in the second half is possible with help from government incentives.

But the China head of a global tier-one supplier told us the truth could be much worse. "Automakers everywhere are squeezing costs right now. None of them dares let up, all of them are demanding cuts, and the pressure runs right through the supply chain," he said. "At every level, the customer asks the supplier below it for an annual price cut of 10%, 15%, even 20%. Refuse and they switch suppliers. Since nobody can squeeze any further, it all lands on the raw-material suppliers at the bottom." He said one American joint-venture brand's plant sat idle for the first two months of this year because of unsold stock.

That helps explain why sales staff arrived at this year's show so much earlier than usual. Salespeople from Buick, Volkswagen and Changan all told us they had to be at the venue before 7 a.m. every day of the show. Shanghai dealerships arranged their own travel; out-of-town staff had it arranged for them. A Ford salesperson said every dealership had been handed a sales quota.

Wang Jing's Buick store actually did well last year, mainly on the new Regal and the Excelle. Battery electric cars sold 15 a month, thanks to new-energy license plates. This year feels tighter. And although the dealer group her store belongs to set no hard sales target for this show, Buick still told every dealership to send people, saying they should "rotate through and make sure every buyer gets served."

Wang Jing is a pseudonym.

Reporter Luo Cong also contributed to this article;

Graphics by Feng Xiuxia; cover image by the author.