False expectations

The dealers association found the Vehicle Inventory Alert Index was at 60.5 percent in April, maintaining an above 50 percent alert level for a fourth consecutive month this year despite April being 7 percentage points lower than in March.

Callarman said: "The inventories are high in the supply chains and in the dealers. The carmakers forecast double-digit sales growth to sustain for a longer period but this year is not what they expected."

The China Association of Automobile Manufacturers forecast an annual growth rate of 7 percent this year, slightly better than last year.

The association's deputy secretary general Shi Jianhua said the projected growth would be difficult to achieve, judging by the market performance so far.

Shanghai Volkswagen's sales dropped 5.56 percent year-on-year in April, while Beijing Hyundai almost maintained its previous year's performance. In contrast, Chang'an Ford managed to sell 10.2 percent more in the first four months and its April sales climbed 6.25 percent.

Le said: "China's auto market is entering a 'new normal'...This is in part accelerated and managed by the Chinese regulators."

Vehicle purchase curbing policies with limited number plate quotas were brought in by eight cities－Beijing, Shanghai, Guangzhou, Shenzhen, Guiyang, Shijiazhuang, Tianjin and Hangzhou.

Callarman said, "The wrong expectations lead to high inventories and result in price cuts."

Jia said, "The demands were underestimated in 2013, and the sector became over optimistic in 2014."

The world's largest auto market had its annual growth rate nearly halved down to 6.86 percent in 2014 from the 13.9 percent year-on-year growth in 2013, according to CAAM statistics.

Callarman suggested carmakers should use logistics forecast data efficiently, as they often use wholesale data, which represents the amount of cars they sell to dealers, rather than the amount delivered to end users.

From this month, Shanghai GM is using a new system to record retail volumes. The system "tracks sales to individual vehicle buyers and it's the method GM uses globally", according to the company.

Reducing stock

Jia said before selling new cars, dealers' priority is to get rid of unsold cars.

"They swallowed so much stock, which may need half a year to digest," he said.

Dealers usually place enough orders to meet the manufacturers' targets and sell slow-moving products at no profit or at a loss. As long as they exceed their targets, a dealer may receive an incentive bonus in return, as well as reducing inventories and boosting cash flow.

However, many dealers failed to beat sales targets last year and as a result received no incentives. Some dealers joined forces and asked for subsidies, or even quit the business, Jia said.

The wave of price cuts by car manufacturers was different from dealers offering discounts as frequently seen in the sector. "The carmakers will undertake the loss for this round, not the dealers. The manufacturers cannot force the dealers to take the inventories and losses," Jia said.

Dealers' promotions are usually launched in the second half of the year in reaction to the market situation, so they can decide on discount rates based on margins and losses.

More battles

Automotive analysts predicted more carmakers would join the battle either publicly or quietly.

LMC Automotive Consulting's Managing Director Zeng Zhiling said many carmakers would react soon but perhaps not in a speedy manner or in a public way.

"Discounts have already been there ... some models actually have 25 percent off. The manufacturers may give subsidies to dealers quietly, but the public cuts in MSRPs are to inspire the dealers' confidence, because it means lower buy-in costs for dealers," Zeng said. He Qiuhui, analyst and editor-in-chief of car review website che310.com, said French and Japanese brands might follow the cuts but the range is unlikely to outnumber the Shanghai GM cuts.

KPMG China's Director of the Automotive Sector Huu-Hoi Tran said Chinese brands will see heavy pressure to survive, and they may consolidate and focus on budget cars to stay in the game.

"Car manufacturers will have to change the way they manage dealer networks, such as offering less incentives."