Author: Zhou Zhiyu Editor: Zhang XiaolingIn the recent landscape of the Chinese automotive sector, a major upheaval has begun to reshape the market dynamics. What was once a conventional industry is witnessing fierce competition and pricing wars never seen before, prompting car manufacturers to make tactical maneuvers in a bid to stay ahead.On November 27th, BYD sent waves through the automotive community when it issued a notice to its suppliers demanding a price drop of 10% on products starting January 1, 2025. This news catch fire online, drawing attention from both the automotive industry insiders and the general public. Confirmation from multiple suppliers assured the validity of the email, further fueling discussions about cost-cutting measures among automakers.Li Yunfei, the General Manager of BYD’s Brand and PR Department, responded, confirming that the annual bargaining process with suppliers is standard practice in the automotive sector. He noted that the request is not a mandatory directive but a target achievable through negotiation, providing flexibility in discussions.In the wake of a pricing war that has escalated over the past two years, automotive companies have amplified their demands for cost reduction and efficiency enhancement. Internally, firms are focused on consolidating resources, innovating technologies to lower costs, and negotiating procurement prices, all aimed at bolstering the competitiveness of their products in an increasingly cutthroat market.However, the brutal reality is that during the third quarter, the profit margins per vehicle sank to record lows across the industry, making it increasingly rare to find car manufacturers maintaining profitability amid these challenges.Suppliers and dealers also find themselves entangled in this relentless competition, with attempts to push back against cost constraints proving increasingly difficult. The price-cutting war shows no sign of letting up before the industry reaches its endgame, with a reshuffling of the supply chain inevitable, leading to a new structure in the marketplace.The GameThe request for price cuts has put the ongoing negotiation dynamics between automotive manufacturers and their supply chains into the spotlight.According to feedback from multiple automotive industry personnel, requests for price reductions from manufacturers are commonplace; however, the extent of these reductions can vary based on procurement volume and delivery timelines. Notably, domestic brands tend to demand reductions that surpass those of joint venture brands.One supply chain insider shared that typically, products entering the supply chain undergo comprehensive lifecycle assessments to meet annual cost-cutting targets set by automakers. The previous norm was a yearly reduction of 3% to 5%, but heightened competitiveness over the last two years has led manufacturers to call for steeper cuts.Furthermore, some industry sources disclosed recent instances where a car manufacturer set rigid cost-reduction targets internally for specific components, with the stipulation that if they weren’t met, they would re-tender until a supplier provided acceptable pricing.BYD has consistently highlighted its vertical integration capabilities, which allow it to handle parts supply through its internal network of suppliers, although it still relies on external suppliers for a portion of its components, accounting for approximately 20-30% of its sourcing needs.This proportion is expected to continue decreasing, as evidenced by statements at a suppliers' meeting in November where BYD articulated its intent to phase out suppliers lacking in competitiveness.For external suppliers, getting into BYD's supply chain can be a double-edged sword.With sales surpassing 3.25 million units in the first 10 months of this year, BYD is expected to reach an annual target of 4 million units. Such scale means that suppliers who manage to gain entry can secure significant volume, ensuring cash flow even amid challenges of thin margins.Simultaneously, suppliers are encouraged to explore opportunities outside of BYD to achieve balance between scale and profitability, meaning that as long as suppliers maintain competitive technology and cost control within niche markets, being associated with BYD can serve as an excellent stepping stone.A recent example is the newly-listed company, New Aluminum Era, which relies significantly on BYD, securing around 80% of its revenue from them last year. In May, it passed CATL's qualification review and anticipates to commence mass production in this year for battery boxes, having obtained several project approvals as well.Yet the competition among BYD’s suppliers is fiercely intense. Should they fail to meet BYD's cost-cutting goals, resulting in decreased order quantities and underutilization of their production lines, the cycle of scaling, cash flow, and profit becomes disrupted. As a result, some suppliers have elected to pass on costs to stay within BYD's “circle of friends.”In responding to investor inquiries, New Aluminum Era confirmed that since becoming part of BYD's supply chain in 2016, their transaction prices are determined through competitive negotiations or bidding processes, reflecting market conditions.Another BYD supplier, Meilixin, shared during a meeting with investors on November 28th that it will implement multi-faceted strategies to deliver cost reductions and improve product competitiveness amidst market competition.The Intense BattleSupplier pushback is merely a reflection of the ongoing two-year pricing war among manufacturers. This conflict promises to intensify further and shows no signs of abating.According to Gung Min, Head of the China Automotive Research Department at UBS, the price war in 2025 may erupt sooner than in previous years. Traditionally, the post-Spring Festival market has seen price reductions around March, but with the Spring Festival arriving earlier next year in late January, pricing battles are likely to commence ahead of schedule.From BYD's demand for supplier cost reductions to the recent relaunch of Feifan Automotive under SAIC Passenger Vehicles, the merger of Zeekr and Lynk, and GAC's strengthened management of its self-owned brands, a cascade of actions signifies that manufacturers are actively adjusting in preparation for forthcoming eliminations, consolidating resources to reduce costs and enhance efficiency.Consensus within the industry indicates that this upcoming phase of eliminations will be increasingly cutthroat, with market shares anticipated to concentrate further among top performers. Changan Automobile Chairman Zhu Huarong stated that by the end of 2025, the disparity between strong and weak manufacturers will become more pronounced; Xiaopeng Motors' Chairman He Xiaopeng also acknowledged that the industry's fierce competition might persist until 2026 or 2027, with projections suggesting that only seven mainstream automobile brands will remain over the next decade in China.In the email sent to suppliers, BYD highlighted that the year 2025 will not only bring significant opportunities for new energy vehicles but will also intensify competition, marking a “great battle” and “elimination race” within the industry.Car manufacturers are gearing up for an even more aggressive price war in the coming year.It is foreseeable that as car manufacturers consolidate their brands and the industry undergoes a reshuffling, the associated suppliers and dealers will also experience a significant turnover, accelerating transformation across the entire supply chain.Rapid advancements in new energy technology are driving replacements in the market, with new suppliers emerging swiftly while older ones face obsolescence.Notably, the battery supply chain, which once occupied the fringes of the fuel vehicle era, has surged forward, exemplified by firms like CATL—valued at over a trillion, now a pivotal player in the global auto supply chain. Additionally, suppliers in intelligent hardware, software, autonomous driving, and LiDAR have emerged rapidly, expanding from non-existence to scalability during this new energy revolution.The intertwining nature of the supply chain and original equipment manufacturers (OEMs) reflects a shared destiny. For BYD, this emerging automotive player will need to navigate how to expand while balancing its relationship with suppliers to ensure a stable supply chain.Particularly as Chinese firms venture overseas, expanding localized supply chains, BYD—with its substantial bargaining power and ability to leverage a supplier network to negotiate cost reductions—faces the challenge of establishing long-term stable partnerships with suppliers similar to Toyota's, nurturing a mutual risk-sharing environment that encourages suppliers to commit to BYD while jointly entering global markets.This represents a critical challenge for Chinese automotive firms, including BYD, as they strive to become major global players.