During the opening day of Boao forum, President Xi Jinping announced that China will significantly lower import tariffs for imported cars, and relax the joint venture shareholding requirement (current cap is 50%) for foreign firms in the auto sector.
The two announcements echoed President Xi Jinping’s promise last November to gradually reduce import car tariffs and allow foreign automakers to establish wholly owned facilities dedicated to new energy vehicles in free trade zones. Even though the exact magnitude of the cut was not announced or the timing, China Passenger Car Association estimated that the tariff is likely to decline to 10% from 25% currently. In 2017, China imported 1.1 million cars, accounting for 5% of total China auto sales, down from 6% in 2014 as most automakers have localized key models into China. In relation to the recent trade war talks, the auto sector is actually one of the sectors where the U.S. maintains a large trade surplus with China (not counting auto spare parts). China imported 267k cars, 1% of total China auto sales, from the U.S. in 2017, while only exporting 58k cars to the U.S.*
Lower auto tariffs and the relaxation in foreign auto ownership requirements will negatively affect luxury car joint ventures in China as foreign luxury brands can choose to export new models directly to China. Imported luxury car sales in China stand to benefit in the long run, which will benefit luxury auto dealers. Chinese local brands will also likely benefit given the large price discount relative to foreign brands and reduced competitiveness of joint ventures.
That said, there are two offsetting factors to the above: one is that China still has a cost advantage compared to foreign automakers from scale and low labour costs, and two, locally produced joint venture cars have different characteristics (such as longer wheelbase) compared to foreign cars of the same brand as a result of Chinese customer preference. Foreign automakers are likely to maintain their existing joint ventures, as most contracts have over 10 years until expiration, and building a wholly owned new facility for non-EV cars needs stringent approval from government and takes 3 to 5 years. Experience from FAW-VW's stake change also proved a lengthy and difficult process for foreign automakers to increase their ownership in joint ventures. As a result, the overall impact from the two policy changes will take time to materialize. The changes could be considered astute political manouvers enabling China to export more cars to the U.S. and Europe, as Chinese cars become more competitive.
*Source: U.S. Department of Commerce – International Trade Administration
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