China’s Luxury Car Importers Set for Windfall With President Xi's Tariff Cuts

China’s Luxury Car Importers Set for Windfall With President Xi's Tariff Cuts

Yang Haiyan & Yu Liyan

Date: Tue, 04/10/2018 - 21:48 / source:Yicai
China’s Luxury Car Importers Set for Windfall With President Xi's Tariff Cuts
China’s Luxury Car Importers Set for Windfall With President Xi's Tariff Cuts

(Yicai Global) April 10 -- President Xi Jinping’s plans to cut tariffs on imported automobiles could represent a major boon to luxury car importers in China, while the country’s consumers also stand to benefits, industry insiders told Yicai Global following today’s announcement.

The Chinese government plans to lower duties on car imports this year, Xi announced during his landmark speech at this year’s Boao Forum, adding that the country does not seek a trade surplus and sincerely hopes to increase imports to achieve a greater balance of payments under its account

Running from April 8-11, the Boao Forum, China's answer to the Davos World Economic Forum, brings together leaders from government, business and academia from Asia and other continents to share their vision for the most pressing matters facing the region as well as the world as a whole.

The proposed tariff cuts will help boost luxury car imports in China, Li Yanwei, an auto analyst, told Yicai Global. China currently imposes a 25 percent tariff on imported cars, compared with 15 percent in the EU and 2.5 percent in the US. China is expected to slash tariffs by at least 10 percentage points to match the EU levies.

"Gains from the tariff cuts will be split between manufacturers, dealers and consumers. It will not lead to a sharp increase in luxury car sales this year, but will help car makers to improve profitability substantially,” Li said.

The impact of the proposed tariff cuts on China’s luxury car market depends on the size of such cuts, Cui Dongshu, secretary-general of China Passenger Car Association, told Yicai Global. “If the import tariff is cut to below 10 percent, it will have a profound impact on the competitive landscape of the entire luxury car market.”

“Some luxury car makers may choose to manufacture vehicles in countries with relatively lower production costs and export such vehicles to China rather than producing cars locally. However, if the tax rate remains above 10 percent, the tax cut will have little impact on the price system and market landscape.”

“The proposed tax cuts will be good news for consumers but will have a mixed impact on auto companies,” said Mei Songlin, managing director of US marketing information services provider JD Power Inc.’s China operation. “On a macroeconomic level, China is sending a signal of friendliness regarding trade to the world. Lowering tariffs on imported goods such as automobiles is in line with the general direction of the development of the Chinese market.”

With lower tariffs, some foreign firms may no longer find it necessary to form joint ventures in China and could choose to export cars produced in areas with lower production costs to the country, Mei said, because many Chinese consumers prefer imported car brands and models, imported cars are expected to gain a greater sales advantage in the Chinese market.

The price gap between imported and domestic-made cars will shrink further after the import tariff is lowered, Mei noted. If China further opens up its market, capacity utilization rates among foreign car makers could increase and their production costs will fall further.

Mei believes the new situation will have a big impact on Chinese-foreign auto joint ventures as well as on some homegrown brands. Many domestic car makers form joint ventures with overseas companies in China and use profits from JVs to support the development of their domestic Chinese brands. Such business models could face challenges under the new environment.

As the prices of imported cars decline, imported mid-range vehicles will impact the domestic low- and mid-range auto market, while imported luxury cars will weigh heavy on the domestic mid-range vehicle market, Mei said, adding that homegrown brands with limited product offerings will face greater pressure.

However, Zhang Zhiyong, an auto analyst, told Yicai Global that he believes import duties on different types of vehicles will be reduced by different increments. For example, the size of tax cuts will be different for parts and complete vehicles as well as for larger-engined luxury cars and smaller-engined vehicles.

He recommended lowering import tariffs on new energy vehicles as much as possible and accelerating the introduction of new energy vehicles produced by multinational car makers such as Nissan Motor Co. and General Motors Co. for the Chinese market.

Cui believes that tariff cuts will have a more substantial impact on the prices of imported smaller-engined vehicles and that if import duties are cut to about 5 percent, the price system for the parallel imported car market may also be affected.

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Keywords: Import Tariff Reduction, Automobile, Market Analysis, Boao Forum