Why Trump's trade threats won't boost foreign automakers in China

In retaliation, Beijing said it will impose tariffs on $3 billion of American goods, most of which are fruits. Both sides hope to settle the disputes through negotiation.

It remains unknown where the talks will lead. Yet regardless of the outcome, the impact on foreign automakers operating in China will be limited.

For global automakers, the Trump administration is likely to obtain two concessions from Beijing. One is looser restrictions on the stake foreign automakers are allowed to hold in local joint ventures.

Under existing rules, foreign automakers must establish joint ventures with local partners to produce vehicles in China. The rules also bar foreign automakers from owning more than 50 percent of the partnerships.

The U.S. is also pressuring Beijing to lower the 25 percent tariff on imported vehicles.

The two concessions were included in a statement Beijing published when Trump visited China in November. By threatening to subject a sweeping range of Chinese goods to high tariffs, Trump might be able to prod the Chinese to deliver the concessions ahead of schedule.

It is hard to see either concession generating much benefit for most foreign automakers.

Global automakers, in general, would prefer to maintain the status quo of their China joint ventures to avoid disrupting local operations.

Nearly all foreign automakers are building vehicles in China through joint ventures formed with local companies. And in the past few years, a slew of international automakers that began local output two decades ago have renewed their joint venture contracts for 25 to 30 years.

Moreover, global brands need Chinese partners now more than before.

Beijing is set to enact a California-style carbon credit program next year to goad automakers operating in China to ramp up output of alternative energy vehicles: electric vehicles, plug-in hybrids and fuel cell vehicles.

Unable to meet the requirements on their own in such a short time frame, Volkswagen Group and Ford Motor Co. each has incorporated a joint venture with a third local partner to produce and sell EVs under new brands.

VW has paired with Jianghuai Automobile Co. and Ford has partnered with Zoyte Automobile Co.

The new partnerships will tap JAC and Zoyte to churn out low-priced small EVs. By doing so, VW and Ford can quickly accrue carbon credits and at the same time avoid undermining brand images.

To quickly earn carbon credits, General Motors started selling a Baojun-badged micro electric car assembled under its light-vehicle joint venture with SAIC Motor Corp. in the southwest China city of Liuzhou late last year.

If Trump can prod Beijing to slash tariffs on imported vehicles, foreign automakers would be able to sell more cars and light trucks in China, but only to some extent.

It’s true Chinese consumers have a strong appetite for foreign cars and light trucks. Sales of imported vehicles in China jumped 16 percent to nearly 1.25 million in 2017.

But the majority of the imports are large vehicles, especially SUVs. As a result, a global brand faces the risk of running a deficit in carbon credits if it significantly increases imports.

If lower tariffs result in a surge of imports, the Chinese government can still find ways to contain the surge. One way to do it is to raise the consumption tax on large vehicles.

Tesla Inc. will benefit tremendously if Trump can pressure Beijing to relax controls on foreign ownership of local joint ventures or cut tariffs on imported vehicles.

The U.S. EV maker now sells imported vehicles in China and is seeking to build a wholly owned subsidiary in Shanghai to manufacture and market in China.

But for other foreign automakers, it will largely be business as usual as the battle over trade between the U.S. and China plays out.


Source: Automotivenews China