The latest reports from China indicate that there is an overall tightening of household belts. This is presumed to be largely from the direct results of US trade policy changes over the last three years. Curious to know how that condition translates into the automobile market in China and more importantly how this affects the US auto industry. 

American businesses in the automobile sector, were expected to feel the heat as they perceived getting hit by new tariffs from both the U.S. and China, this according to a recent survey conducted by the American Chamber of Commerce (AmCham) in Shanghai and Beijing-based American Chamber of Commerce in China. That was before the recent China and US agreements that mitigated those fears of a China muscle car war. More than 60 percent of the survey participants opine that tariffs would result in reduced profits and increased cost of production, especially those American companies that have a significant portion of their business operations in China. They are likely to be hit by a dual impact of tariffs when they have to export to the US but that seems very unlikely, 

US auto exports to China had been surging over the last decade despite a 25% tariff but this does not take into account the establishment of significant US owned Chinese based manufacturing facilities. Nevertheless, in 2017, the United States had exported $10.5 billion worth of cars according to the US Census Bureau. While a Chinese tariff would apply to those cars, the tariff doesn’t apply to those cars made in China.

Ford and General Motors make a significant portion of their car sales cars in China for Chinese customers in joint-venture factories that partner with Chinese firms which both make and sell cars. In fact, both Ford and GM manufacture the majority of their cars sold to Chinese customers in China. China is GM’s biggest customer according to the company but the US factories for BMW and Mercedes could be the big winners if the tariff is pulled, but they too make a significant amount of cars in China and the US.

According to the BMW, its plant in Spartanburg South Carolina, is the largest auto exporter in the United States by value but it’s unclear how many cars made in Spartanburg actually go to China. BMW didn’t respond to a request for that information. Mercedes has a large plant in Vance, Alabama. A Mercedes spokesperson was quoted as saying the majority of the SUVs it produces in Alabama are, in fact, exported around the world but declined to provide China-specific data. 

The uninformed alarmists that cower over a so called “tariff war” appear to have little business acumen and virtually no insight into the flexibility of international businessmen to restructure their product delivery in the face of this political bickering and trade upheaval. The fact is that we are China’s biggest customer and a slowdown in US revenues into China will have a larger impact on China than in the US. China is not a vehicle exporter, mainly because they cannot produce a competitive product amidst the titans in their market. The market for Cadillacs and Buicks in China is very strong but there is no countering market in the US. The only countering market centers around Chinese made parts for US cars. The Chinese parts and repair aftermarket is projected to reach $188 billion by 2020. This market is dominated by foreign and joint venture companies with a 70% revenue share in 2017.

China is the world’s largest vehicle market. According to the Chinese government, expecting that automobile output will reach 30 million units by 2020 and 35 million by 2025.  According to the China Association of Automobile Manufacturers over 27 million vehicles were sold in 2018.  This included 23.79 million passenger vehicles, down 4.08% from 2017, and 4.38 million commercial vehicles, an increase of 5.05%.   The decline in passenger vehicle sales is the first annual decline in at least 20 years.

According to export.gov, China trimmed tariffs on imported cars from 25% to 15% of their wholesale value in 2018 and cut tariffs on 218 categories of imported car parts. This is mainly due to the large number of vehicles operating on Chinese roads. However, China imposed an additional 25% tariff on $50 billion in U.S. imports with $34 billion taking effect in July 2018 and the balance of $16 billion in August.  This tariff included most U.S. made autos and auto parts at rates between 5% and 25%.  In December 2018, China announced that it would temporarily suspend these new tariffs on autos and auto parts until March 2019.  As of June 2019, these retaliatory tariffs on auto parts will go into force. In addition to tariffs, all autos in China are now subject to an engine displacement-based consumption tax that can reach 40% for the largest engines. Also, all passenger cars and medium and small size commercial vehicles valued 1.3 million RMB excluding a $188,000 VAT and above are subject to an additional 10% “Luxury Car Consumption Tax”.[1]

Tariff strategy has been exercised from the earliest days of our republic, but it seems a bit strange for a communist government to be engaged in such jousting capitalistic trade and tax system strategies on the world stage. However, it is evident that when confronted with seasoned capitalist strategies, China employs the free market principles that their students have learned over the last 30 years from US based higher education. Most importantly they have learned that a politically and ideologically based trade war benefits no one and that negotiating good deal is imperative. Participants in these markets are keenly aware that international cooperation keeps everyone happy, at least until a madman takes hold in a country and upsets the balance that keeps international trade fair and balanced and least for now. 

However, communist and socialist governments hold onto their power for longer periods of time than our government. Players like Vladimir Putin have profited from their governments for their personal gain since 1999.  In Putin’s case, he is touted at being worth $70 billion on an annual salary of $187,000,[2] but stranger is that of Chinese president Xi Jinping who has only a net worth of $1million. By contrast, it would seem that the Chinese president is conducting more eleemosynary centered government. For now, this benefits international trade, as long the leadership of our country is in the hands of capable businessmen.    

[1] https://www.statista.com/topics/1013/car-imports-and-exports-in-china/

[2] https://www.celebritynetworth.com/articles/celebrity/how-vladimir-putin-stashed-away-a-secret-70-billion-personal-fortune/