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How Foreign Carmakers Will Gain If China Cuts Import Duty

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According to a Bloomberg report, China is mulling over slashing import duty on passenger cars by an almost whopping 50%. This certainly will be a big relief for foreign automakers that have so long been struggling to sell cars in China due to staggering import duties. According to the report, China’s president Xi Jinping is in the process of ensuring a sharp cut in tariffs on imported cars in order to facilitate fair trade.

The decision comes a week after China announced that it will remove the cap on foreign ownership of domestic auto ventures, which will allow foreign carmakers to take full ownership of their local joint ventures (JVs).

Naturally, there are enough reasons to cheer the decision as currently importing a foreign-made car in China is quite expensive. Lesser import duty means lower costs, which translate into increased selling and higher revenues. At the same time, China’s move may to some extent ease fears of a trade war with the United States. 

Easier JV Restrictions

When China announced its decision to remove restrictions on foreign ownership of domestic ventures, it  gave foreign carmakers an opportunity to take full ownership of their local joint ventures. Lifting this cap will now allow foreign automakers to buy out their partners and enjoy full ownership and most importantly, these companies will no longer have to share 50% of their profits with their Chinese partners (read more: China Lifts Cap on Foreign Auto JVs: Will US Carmakers Gain?).

The announcement should give a major boost to the confidence of U.S. carmakers like Tesla, Inc. (TSLA - Free Report) , General Motors Company (GM - Free Report) , Fiat Chrysler Automobiles N.V. and Ford Motor Company (F - Free Report) as full ownership will help these have complete control of their operations and keep all profits in their own kitty.

Lower Import Duty to Help Foreign Automakers

The second sign of China’s intention toward ensuring fair trade is its plans to cut import duty. According to the Bloomberg report, China’s State Council is planning to cut the 25% import duty to 10-15%. And the new duty might be announced as soon as in May. Foreign carmakers have been long requesting China to consider slashing tariffs on imported cars.

The recent development can make foreign automakers such as BMW or Bayerische Motoren Werke Aktiengesellschaft (BAMXF - Free Report) , Toyota Motor Corporation (TM - Free Report) and Daimler AG , the makers of Mercedes, big winners. BMW is the largest car exporter to China, with a plant in South Carolina, while Mercedes has a plant in Alabama.

These two companies also have plants in China but given the number of units both companies sell in China, it can be said that these stand to benefit if tariffs are pulled. BMW sold more than 517,000 cars in China in 2016, while Mercedes sold more than 170,000 in the first quarter of 2018. Bayerische Motoren Werke Aktiengesellschaft sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Moreover, U.S. carmakers Ford and General Motor export cars from their U.S. plants to China despite having manufacturing units in China. The 25% import duty on cars, which has been in place for more than a decade, definitely has been an obstacle for foreign carmakers given that demand for luxury foreign cars in China is high. A 50% cut in import duty certainly will make things easier for foreign carmakers.

Lower Tariffs to Boost Exports

BMW, Mercedes and Toyota’s premium brand Lexus were the top three imported car brands in China, respectively, in 2017. BMW and Mercedes sold more than 175,000 cars in China, while Lexus sold around 140,000 units in China, hinting at surging demand for imported luxury cars in that country.

And this growing demand is despite the high 25% tariff on cars. In 2017, United States exported $10.5 billion of new and used cars to China according to the U.S. Census Bureau. Relaxation in tariffs means that automakers in the United States can now export more cars, which definitely is going to translate into higher revenues.

China is the second largest market for cars exported from the United States. However, total cars sales in China in 2017 came in at 28.9 million units of which imported cars accounted for only 1.22 million or 4.2%. The picture in the United States is a stark contrast. Of the 1.7 million cars sold in the United States, 49% were imported. Understandably, this is because import duty on cars in China is 25%, while that in the United States is only 2.5.

Moreover, Toyota’s Lexus has plans of growing its sales to China by 23% to 160,000 vehicles in 2018. On the other hand, BMW recently said that it expects its China sales to decline almost 50% this year to 7-8% from 15% in 2017. A cut in tariff might help both these companies. Slashing import duty to 10-15% might aid the likes of Lexus sell vehicles more smoothly, while for companies like BMW sales might not be affected to a large extent.

Summing Up

Despite the soaring demand for imported cars, foreign automakers have been struggling to boost their sales in China for a long time due to the high import duty. However, China’s plan of slashing the import duty is likely to boost to the confidence of foreign carmakers. Imported cars would obviously grab a larger percentage of total car sales in China in the long term thanks to this development, thus pushing up the profits of foreign carmakers.  

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