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Tesla Cuts China Car Prices: Can Others Survive Tariff Heat?

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Tesla, Inc. (TSLA - Free Report) announced that will be slashing the price of two of its models in China. This is a strategic move by the company to absorb the impact of tariffs as a result of the ongoing trade spat between the United States and China.

Higher prices of cars owing to tariffs have resulted in a significant decline in car sales, thus affecting the margins of carmakers. So much so, that many analysts believe that Trump’s push to impose tariffs on imported cars and auto parts along with other goods could pose a threat to the U.S. economy.

Tesla Cuts Car Price in China

Tesla said that it will be cutting the price of its Model X and Model S in China by 12% to 26% to make cars more affordable. The move follows Tesla’s decision in July to hike prices of these two models in China by about 20% in response to tariffs. Tesla was one of the first U.S. automakers to raise the price of its models in China.

The recent decision is in a move to absorb the impact of tariffs from the U.S.-China trade war on customers. In July, China retaliated with tariffs on $34 billion worth of U.S. imports including cars. Tesla imports all the cars its sells in China as it doesn’t have a production unit in that country yet.

However, last month, Tesla had warned that it was facing major problems in selling cars in China due to the new tariffs and would be forced to increase investment in its first overseas production unit in Shanghai.

Domestic Carmakers Continue to Suffer

Major domestic carmakers like Ford Motor Company (F - Free Report) , General Motors Company (GM - Free Report) and Fiat Chrysler Automobiles N.V. (FCAU - Free Report) too have been feeling the heat from tariffs. Auto industry officials believe that the possibility of Trump imposing higher tariffs on imported cars and automotive parts could pose a threat to the country’s economic competiveness.

Last month, Ford said that tariffs have made steel more expensive in the United States than any other market and that the company sustained roughly a $1 billion hit to profit despite sourcing most of its metals from the United States.

Price Performance of Major Automakers Year to Date

Ford’s China car sales continue to deteriorate. The company’s sales dropped 43% in September year over year. Although General Motors has fared better, it recently reported that its China sales in the third quarter were down 14.9% year over year to 835,934 units, faster than the 2.5% decline in the first nine months of 2018. Fiat too has been feeling the heat of increased tariffs.

Year to date, shares of Ford, Fiat and General Motors have declined 27.1%, 9.2% and 13.3%, respectively, while Tesla has gained 8.6%. Tesla and General Motors each carries a Zacks Rank #2 (Buy), while Ford carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Not only domestic automakers but other foreign car manufacturers with assembly operations in the United States have been suffering as a result of the tit-for-tat tariffs.

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