Tesla and Apple in the Chinese price war. From a business perspective, the Middle Kingdom is starting to resemble Brazil

Luc Williams

Laura He writes for CNN about how changes in Chinese consumption patterns “forced” the largest American companies to take part in the Chinese price war.

Tesla in a 'race to the death'

Price wars between companies competing in a given industry have become an everyday occurrence for brands operating here. This is perfectly visible in the example of electric vehicles, where, as Laura He puts it, there is a “race to death”. Who is running in this race? Mainly two companies – Elon Musk's Tesla and the domestic BYD.

According to data from the China Passenger Car Association, in April 2024, Tesla's market share dropped to 4%. Quite noticeably – in March it was 7.7 percent. Deliveries from Tesla's largest factory in Shanghai fell by 18%. y/y. Meanwhile, its main rival, BYD, is doing quite well, increasing by 29 percent at the same time. deliveries of only electric cars.

Grasping at straws, Tesla significantly reduced its prices in China, right after also doing so in Germany and the United States. This is not Musk's first nod to Chinese electric fans – it is another in a series of reductions that have been going on since the end of 2022.

Apple fights the “Chinese technology champion”

Apple is also fighting a great battle for the souls of Chinese women and men, and specifically what brand of smartphone they will carry in their pockets. The rival here is the domestic Huawei, as He graphically writes, “the Chinese technology champion that the West once tried to kill.”

Apple seems to have started losing this fight. Its total revenues in the so-called Greater China, including China proper (called mainland), Macau, Taiwan and Hong Kong, fell by 8% in the first quarter of 2024. Maybe not much, but, according to the Chinese government company China Academy of Information and Communication Technology, this result was influenced by the fact that the American manufacturer reduced iPhone prices in China, which ensured an increase in deliveries in March. The previous two months ended with huge declines.

Meanwhile, Huawei is growing rapidly. In the first quarter of 2024, the company's smartphone sales increased by 70%. This is the result of the success of their latest product series, Mate 60, which recently premiered. However, Tim Cook, Apple's CEO, has no intention of giving up. “China is the most competitive market in the world,” he said. He added that he was still optimistic.

Starbucks is losing its tone

Cafes are also involved in a price war. Starbucks present on the Chinese market has serious competition in the form of two domestic chains – Luckin Coffee and Cotti Coffee. Cotti is a startup founded by two former Luckin executives, and it started by offering customers a latte for 9.9 yuan ($1.4, PLN 5.51). When Luckin adjusted its price list to this proposal, Cotti did it again. Now you could get a latte for just 8.8 yuan (1.2 dollars, 4.72 PLN).

Starbucks, which initially declared that it did not intend to participate in the Chinese price war, faced the above-mentioned phenomena, as well as the fact that in the first quarter of 2024, the average bill paid by a Chinese in this cafe was 9% higher. smaller than before, he lowered his tone a bit. For a latte you usually had to pay 30 yuan (4.2 dollars, 16.52 PLN), and as a result of the price fight between brands – it was already below 20 yuan (2.8 dollars, 11.02 PLN).

– We have noticed an increase in competition in the segment of offers for mass customers, focusing on rapid store expansion and low prices. Chinese consumers have become cautious in their spending, commented Belinda Wong, president and co-CEO of Starbucks China.

McDonald's with a windfall for the poor

“Poor man's deal” – this was the unofficial name of the promotion organized in 2022 in Chinese McDonald's. It can be translated loosely as “The poor man's windfall.” The correct name of the stock is “1 + 1 = 13.9 yuan”. The point is that for this rather modest amount ($1.90, PLN 7.48) you could order two things from a special card. The campaign was very popular among customers and quickly inspired similar promotions in other fast food restaurants.

Guides on when, where and what you can eat for free or cheaper have become popular on Chinese social media. “On Mondays, free nuggets at McDonald's”, “on Wednesdays at Dominos, 30% off. discounts”, “crazy Thursdays at KFC” – they tell those interested.

The record in this matter was set, as He writes, by the Beijing chain Nanchengxiang. It introduced a “buffet breakfast” offer for 3 yuan (41 cents, PLN 1.61). This set has been hailed online as a “must have for poor working people in Beijing.” Since it became as cheap as possible, its sales have more than doubled during breakfast hours.

China is like Brazil: big, important, but difficult

“China now has the status of Brazil. They are a large and important, but difficult player,” Anne Stevenson-Yang from J Capital Research commented on the business situation of the Middle Kingdom. To understand where this change in mood comes from, you need to look at macroeconomic data. Excluding the pandemic years, in 2023 China's GDP grew the weakest (by 5.2%) since the international sanctions for the Tiananmen Square massacre in 1989 (in 1990 it grew by a record low 3.9%).

The worse economic results have been followed by a deterioration in the professional situation of the Chinese and lower incomes, and their willingness to purchase products and services is not improved by the protracted crisis on the real estate market, where 70 percent of the population is located. wealth of Chinese households. So the Chinese are looking where to save money. Premium shopping, associated with luxury, according to Counterpoint Research analyst Yang Wang, has faded into the background.

As business analysts say in an interview with He, the market today has changed the way we think about China. It's no longer the 1990s when “every Western company” hired consultants to expand into the Chinese market. Back then, investors talked about “taking advantage of the rapid economic growth in the Middle Kingdom.” Now they would rather “exit or protect their operations or diversify sales into other countries.”

China's emerging middle class: true or false?

What will Western business, which has already established itself in China, do about this situation? According to Yang, depressed consumer sentiment will persist for some time, and foreign brands are at a disadvantage here due to higher operating costs. According to the analyst, however, they will not withdraw from the Chinese market, although many of them will re-analyze their pricing policy.

Looking into the medium and long term, analysts have no doubt about the central role that the Middle Kingdom will play in driving global economic growth. It will continue to produce masses of a consumption-hungry middle class. According to Yang, given the economic problems of Western societies and the immaturity of emerging markets such as India, China will remain a lucrative market for global business for a long time.

Stevenson-Yang sees it slightly differently. “The basic mistake of many Western companies was believing in the myth of the emerging middle class,” he admits bluntly. Meanwhile, in her opinion, the Chinese have never experienced a large increase in income, and Chinese money comes from capital gains from real estate and the stock market. Regardless of which of the analysts is closer to the truth, one thing is certain – investors on the Chinese market should remain vigilant.

About LUC WILLIAMS

Luc's expertise lies in assisting students from a myriad of disciplines to refine and enhance their thesis work with clarity and impact. His methodical approach and the knack for simplifying complex information make him an invaluable ally for any thesis writer.