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China has big bumpers to fend off car wars

Its carmakers are the least vulnerable to external forces compared with counterparts elsewhere; Trump's tariff assault is unlikely to put much of a dent in their products

Beijing

US President Donald Trump is trying to take on the single most globalised industry - and China. But the world's largest car market won't budge.

Beijing reduced duties on autos on July 1, just before the imposition on Friday of US tariffs on US$34 billion of Chinese goods.

China's carmakers, like its consumers, are the least vulnerable to external forces compared with counterparts elsewhere.

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The tariffs with which Mr Trump is intimidating the auto industry will, on the other hand, wipe out a swathe of bottom lines, burn a hole in every American car buyer's pocket and trigger widespread job losses.

Part of the explanation for this contrast is that China's carmakers are much less globalised than the foreign brands that scurried into their market. In 2017, the nation exported almost US$70 billion of parts and US$14 billion of cars. Imports were more than US$50 billion of vehicles and about US$40 billion of parts.

In the months leading up to the current chaos, Chinese two-way automotive trade with the rest of the world ticked up. The US imported more auto components from China than vehicles, but exported more cars to China.

Some parts makers, seemingly vulnerable with a revenue exposure to the US of almost 50 per cent, already have facilities in America and other countries.

The strength of China's domestic market of more than 20 million units a year has been underpinned by a rough supply equilibrium.

While sales have slowed to a still-healthy annualised pace of about 5 per cent, and inventory has tended to build up, production is also beginning to cool. Over the last five years, monthly output and inventory have been negatively correlated. That helped global automakers reap the benefits of fat profit margins in China, despite operational constraints.

That stability now looks like it could act as a buffer if pricing pressures increase. When China cut auto tariffs, many manufacturers, domestic and foreign, announced reductions in suggested retail prices of 6 per cent to 7 per cent. That was despite virtually no change in forecourt prices.

To be sure, severe pricing pressures have hit China in the past. Supply fears and slowing sales in 2014 and 2015 put carmakers on edge, with several announcing discounts.

China's industrial policy for cars buttressed the industry against domestic tariffs and potentially higher US levies.

Since China said it would relax foreign-ownership limits, it also limited approvals of licences for cars that burn fossil fuels, and blocked companies from buying up non-operating assets.

That means new entrants don't have it as easy as before, and gives foreign companies an incentive to operate in partnership with local automakers.

And don't forget Chinese consumers. They're still spending, and they place more importance on brands than on prices.

The likes of Brilliance BMW and Beijing Benz are posting double-digit sales growth - 54 per cent and 20 per cent, respectively, year-on-year in the first three weeks of June.

The Daimler and Bayerische Motoren Werke ventures were helped by new entry-level models for younger buyers.

In contrast, sales by the local ventures of Ford and General Motors fell about 60 per cent and 30 per cent, respectively, in the year to date - compared with the same 2017 period.

Carmakers in China churn out almost 400 models, roughly double the number on offer in the US and Europe.

Yet Chinese automakers' stocks are plunging: down 25 per cent to 30 per cent on average this year, and 47 per cent in the worst case.

The broad market, burdened by trade conflict and domestic funding worries, has fallen a more modest 20 per cent or so. Global auto peers, on the other hand, have declined 15 per cent or less.

The irony of all this is that while Mr Trump's tariff assault may have hurt the market value of China's automakers, it's unlikely to put much of a dent in their products - that fate awaits the US. BLOOMBERG