China has hiked tariffs on US imported vehicles but simultaneously lowered tariffs on automobiles from other countries alongside promoting foreign ownership in the industry. We think this is a response to the intensifying trade dispute and will change both the production and consumption of China’s automobile industry
Most of China’s automobile output is passenger cars. Commercial vehicles make up less than 20 percent of the auto production market, though, in terms of growth rates, commercial vehicle production has grown more quickly than passenger cars since early 2017. But we don’t think China is about to make significant changes to the market share of this industry.
Market dominated by joint ventures
As passenger cars constitute the bulk of automobile production in China, we will focus on their production and sales and how tariffs and changes in foreign ownership could affect this market.
The Chinese automobile market is mainly a joint venture market with both domestic and foreign auto producers producing joint venture brands. This is a legacy of the first auto manufacturing in China, which started with joint ventures. Local brands did not have a chance to develop.
There might also be a “consumption bias” on joint-venture brands, since early on, there may have been little trust in local brands, even if the foreign joint venture brands were manufactured in China. Most automobile companies in China have joint ventures with European and Japanese manufacturers. There are only a few Korean and American joint ventures.
According to media reports, foreign players have around 60 percent of sales in the Chinese automobile market which includes joint ventures.
However, one caveat to this is the new-energy cars that are being built from scratch. One consequence of this is that some local brands are becoming more popular in the electric car arena than established joint ventures of traditional combustion cars, for example BYD.
Imports rise, but still account for minor share
Currently, auto-import volumes are still only about 5 percent of domestic production, but the import trend has picked up from around 43,000 in early 2015 to about 76,000 units now.
Imports have been much larger than exports in terms of passenger cars (around 30,000 units per month) and also in terms of the dollar value. The rise in imports from 2016 indicates there is room for more imports in the Chinese passenger car market.
We believe the market is changing as consumers will prefer foreign brands after tariffs have been cut for most imported cars. We expect local production to fall as imports increase after the tariff changes.
Tariffs make US imports more difficult
Looking ahead, prices of automobiles imported into China from the US will become even higher compared to other import origins. US car imports will attract an additional 25 percent of tariffs under the US$16 billion goods tariff list effective August 23, which delivers a total tariffs rate on imported American cars to 40 percent. What’s worse for US imports is that China has lowered tariffs for automobiles which aren’t American to 15 percent from 25 percent.
The net effect will be a price cut for cars imported to China except, for the cars imported from the US. Unsurprisingly, we expect Chinese consumers to favor purchases of European cars.
Though the changes in tariffs will benefit European imports and hurt US ones, they could also have some substitution effects on European joint venture brands produced in China, which may grow more slowly as a result.
The US export market for China’s passenger cars is very small. China’s main export market is Asia and Latin America, so tariffs imposed by the US shouldn’t affect China’s passenger car exports in general.
Eased foreign ownership rules
By relaxing the rules around foreign ownership, we expect more foreign brand new-energy vehicles to be produced in China. Tesla has already set up a production factory in China. In the future, foreign wholly-owned automobile production in China may not only serve the domestic market but also help increase exports.
This could bring competition to local brands that focus on new-energy car production. But as we expect the pie of new-energy vehicles to expand, the competition that local new-energy vehicle brands may face may not be as fierce as competition in the traditional car market.
The change in foreign ownership policy will not benefit all global passenger car producers equally. If they do not manufacture new energy cars, i.e., traditional combustion cars, then they need to wait until 2022 to have the joint venture restrictions removed.
In short, changes in policies in the automobile sector, namely on tariffs and foreign ownership, will induce Chinese consumers to buy more imported cars from the rest of the world (except the US) and to buy fewer imported cars from the US. US automobile producers, which are also new-energy car producers, can build production lines in China now without ownership restrictions.
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