(Yicai Global) March 7 -- The price reductions that began in China’s new energy vehicle sector, after US electric car startup Tesla began to slash prices at the beginning of the year to boost sales, has now extended to fossil-fuel-powered cars as fierce competition and low-buying power trigger a price war in China’s auto industry.

"Tesla's price cuts forced many NEV makers to adjust their prices, and this filtered through to the fossil-fuel-powered car sector in February, bringing retail prices down," Lang Xuehong, deputy secretary general of the China Automobile Dealers Association, told Yicai Global.

"Since last month, almost all carmakers have been cutting prices, as the competition is too fierce," a sales director at a dealership for a joint-venture carmaker told Yicai Global. “As March is the last month of the quarter, dealers will continue to introduce discounts to meet their quarterly sales targets,” he added.

Many JVs with foreign auto manufacturers such as Germany’s Volkswagen and Japan’s Toyota and Honda are offering discounts of between CNY20,000 (USD2,881) and CNY30,000, Yicai Global has learned.

"The big discounts being offered by Nissan, Honda and other vehicle manufacturers mean that dealerships also have to reduce their prices as their inventories are high. Some are slashing prices without end and even reducing the prices of new models," the sales director said.

Auto dealers have no choice but to cut prices as their inventory piles up. China's auto dealer inventory warning index reached 58.1 percent in February, a gain of 2 percentage points from the same period last year, but a drop of 3.7 percentage points from January, according to the latest survey released by CADA in February.

"Declining consumer purchasing power, especially on the lower end, is the main reason for the current price war. This led to a significant drop in sales of the cars made by Chinese brands priced under CNY100,000 (USD14,400) last year," a manager at a Chinese car manufacturer said.

Some 80.2 percent of dealers believe that February sales did not meet expectations, according to CADA data. They all mentioned heavy inventory pressure and poor cash flow. On top of this, fierce competition is playing with the retail price, squeezing profit margins.

Most dealers are running at a loss and have run up high debts, according to the manager. Manufacturers are encouraging dealers to buy products with big discounts so as to transfer the pressure downstream. However, amid the market downturn, it is difficult for dealers to make a profit after buying plenty of vehicles.

Editors: Tang Shihua, Kim Taylor