Chinese President Xi Jinping announced a raft of measures to further open up the economy at the Boao Forum Asia in the southern island of Hainan on Tuesday, most likely mitigating the risk of a looming trade war with the United States.
While global equities have responded positively to his speech, investors are concerned about the outlook of mainland automakers under the new policies, particularly his pledge to reduce the tariff on imported cars and relax the restrictions on foreign investment in the car industry.
So, will the new measures pose a big threat to domestic players?
To answer this question, let’s take a brief look at the situation in China’s automobile sector.
China has been the world’s largest auto market over the past nine years. Total vehicle sales rose 3 percent to 28.88 million units last year.
Of this, local and joint-venture brands accounted for 43 and 53 percent of the respectively. That means imports accounted for a mere 4 percent.
China’s automobile market can be roughly divided into three segments. The low-end market has a price point of around 80,000 yuan (US$12,700), the mid-tier market covers cars costing between 80,000 and 300,000 yuan, while the high-end refers to those priced at more than 300,000 yuan.
Currently, domestic carmakers dominate the low-end segment with nearly 90 percent market share. They have a huge advantage in labor and transport costs, while their products are largely comparable to foreign rivals in functionality and quality.
As such, lower or even zero tariffs on imported cars wouldn’t make much of a difference. Domestic cars will remain competitive.
Chinese automakers are also tapping into emerging markets with their low-end models. Together, they exported 1.06 million vehicles last year, up 31 percent from 2016.
Regarded as good value for money, Chinese cars are well-received in Southeast Asia, Africa and South America.
Meanwhile, joint ventures dominate the mid-range segment. Supported by a complete supply chain and economies of scale, domestic brands in this sector are likely to retain their dominance even in the face of more imports.
Would their foreign partners demand a higher stake, thereby diluting the local partners’ interests?
Foreign auto companies are allowed to have up to a 50 percent stake in joint ventures, a cap that has been in place since 1985. President Xi promises to relax this limit.
Although it is possible for foreigners to demand a higher stake, they will have to go through the process of negotiating with their local partners.
If the asking price is too high, the status quo will most likely be kept. As such, the risk is not that imminent.
With regard to the high-end segment, local brands are not yet good enough to compete with foreign rivals. While lower tariffs will most likely lead to a surge in imports of expensive marques, that is not going to affect domestic makers very much.
This article appeared in the Hong Kong Economic Journal on April 12
Translation by Julie Zhu
[Chinese version 中文版]
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