How China auto tariff cuts could affect the mainland’s carmakers

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The announcement of tariff cuts for China’s auto imports and eased foreign-ownership requirements in Chinese President Xi Jinping’s Boao Forum speech won’t necessarily hurt the mainland’s automakers much, analysts said.

China’s tariff on imported vehicles is currently 25 percent and analysts have speculated it now be cut to as low as 10 percent. The speech also highlighted that the current rules restricting foreign ownership of auto companies at 50 percent would be eased; that’s been a key source of tension between China and foreign companies trying to put factories on the mainland.

Analysts said the impact of the tariff cut on Chinese-based automakers would vary.

“For local OEMs with low-end and mid-range brands, we believe the impact should be quite limited as most models are already locally produced,” Daiwa said in a note on Tuesday. It expected shares of Guangzhou Automobile Group, or GAC, to feel some sentiment pressure, based on the decent import volume of Toyota-brand vehicles.

“Limited impact from tariff cut on low- and mid-end brands OEMs, while luxury brands such as BMW Brilliance, BAIC Benz may be under pressure but the impact would not be significant,” Daiwa said.

Will luxury brands get hit?

Daiwa said that competition may rise in the 3.0L segment, such as the BMW 5 Series and Mercedes E class, but it noted that the tariff cut would likely result in a 40,000 yuan, or US$6,369, tax cut on those models, compared with the current retail price of around 550,000 yuan.

“We don’t see a 40,000 yuan tax saving affecting significantly the sales performance of import vehicles,” Daiwa said.

Alternately, Nomura said in a note on Wednesday the potential tariff cut would be most positive for luxury brands that don’t have local production in China yet, such as Lexus and Porsche.

But for the luxury brands already producing on the mainland, such as Mercedes, BMW and Audi, once their models have localized, those same models were unlikely to be imported as well, both to avoid internal competition and because the imported model would still face the lowered tariff and logistics costs, Nomura said.

Indeed, Daiwa said the market appeared to have overestimated the tariff-cut impact on local automakers and said it was likely a good opportunity to buy stocks such as Brilliance and GAC, both of which it rates at Buy.

Foreign-ownership limits

When it comes to potentially allowing foreign companies to own more of their auto production on the mainland, Daiwa said that could be negative for local players which own stakes in foreign joint ventures.

“Global OEMs might seek higher equity interest and complete control of its vehicle production in China, through forming new JVs with domestic players,” it said, noting that would hurt current JV players, such as GAC, DFM, BAIC and Brilliance. It rates DFM at Outperform and BAIC at Hold.

But Nomura was skeptical of the idea that foreign automakers would abandon their JV partners.

“Automakers are no longer allowed to establish a new project or JV to manufacture traditional combustion engine cars,” it said. “Hence, it
is highly unlikely that a foreign automaker will abandon its existing domestic JV partner and set up a new, majority-owned subsidiary to
replace its existing 50/50 JV.”

It said the most likely scenario was of a win-win situation of transferring the minority stake over a more extended period, such as allowing the foreign partner to increase its shareholding as high as 65 percent in exchange for assurances of a long-term product pipeline for the JV.

New Energy Vehicles to benefit?

Nomura added that foreign companies potentially would be allowed to set up majority- or wholly-owned projects to produce new energy vehicles.

Other analysts also pointed to this segment of the market as a potential opportunity.

“The NEV segment will see larger benefits as the higher participation of foreign companies could help to promote the development of the NEVs. We expect a change in the current domestic competition landscape,” China Galaxy International said in a note on Wednesday. “The higher market penetration of domestic auto parts and components in the NEV segment would promote an upgrade of China’s auto industry towards the NEV and smart technologies.”

Stock picks

China Galaxy tipped Xusheng Auto Technology and China Grand Automotive Services as potential beneficiaries of the proposed regulatory changes.

Meanwhile, Nomura said that Geely, which it rates at Buy, and Great Wall, which it rates at Reduce, would be the least affected by the changes as they compete in the low-to-mid segments and aren’t relying on profits from JVs with foreign companies.

It said the share price correction in players relying on JVs was likely overdone, adding that BAIC, which it rates at Buy, offers the best risk-reward due to a “compelling valuation.” Nomura said Buy-rated Brilliance also offered attractive value.