China’s Carmakers Have a Strong Home Front in This War

(Bloomberg Opinion) -- Donald Trump is trying to take on the single most globalized industry — and China. But the world’s largest car market won’t budge.

Beijing reduced duties on autos July 1, just before the imposition Friday of U.S. tariffs on $34 billion of Chinese goods. China’s carmakers, like its consumers, are the least vulnerable to external forces compared with counterparts elsewhere. The tariffs with which Trump is intimidating the auto industry will, on the other hand, wipe out a swath 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 globalized than the foreign brands that scurried into their market. In 2017, the nation exported almost $70 billion of parts and $14 billion of cars. Imports were more than $50 billion of vehicles and about $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 U.S. 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 U.S. of almost 50 percent, 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 annualized pace of about 5 percent, 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 percent to 7 percent. That was despite virtually no change in forecourt prices. (In fact, prices of some premium brands have fallen faster than those of domestic models.)

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 U.S. levies. Since China said it would relax foreign-ownership limits, it also limited approvals of licenses 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. Meanwhile, Beijing is luring investment across the auto sector.

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 percent and 20 percent, respectively, year-on-year in the first three weeks of June. The Daimler AG and Bayerische Motoren Werke AG ventures were helped by new entry-level models for younger buyers, and a recent reduction in a purchasing incentive did nothing to dent demand. In contrast, sales by the local ventures of Ford Motor Co. and General Motors Co. fell about 60 percent and 30 percent, 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 U.S. and Europe, and the split between SUVs and sedans has started to even out: The latter now account for about 48 percent of the passenger-vehicle market. Buyers are calling the shots, and the carmakers are listening.

Yet Chinese automakers’ stocks are plunging: down 25 percent to 30 percent on average this year, and 47 percent in the worst case. The broad market, burdened by trade conflict and domestic funding worries, has fallen a more modest 20 percent or so. And global auto peers have declined 15 percent or less.

The irony of all this is that while 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 U.S.

To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net

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