Wednesday, 16 Jan 2019
Business

A victory over car rates in China is not relevant for automakers

They are not going to "chat" about car rates in China, but the real action is on car manufacturers.

The agreement reached between US President Donald Trump and his Chinese counterpart Xi Jinping has caused confusion. Trump tweeted that China was cutting and abolishing its 40% tariff on imports of American cars – two very different things. Auto stocks resumed on the news on Monday, but the next day, Larry Kudlow, Trump's chief economic advisor, retracted his remarks. Treasury Secretary Steven Mnuchin said China has agreed to eliminate tariffs, without giving details.

As a reminder, China has reduced import duties to 15% from 1 July, from 25% to 20% for heavy goods vehicles and 20% for motor vehicles and their components. The United States applies a 27.5% tariff on car imports in China and 25% on trucks.

China's reduction or elimination of tariffs is largely unimportant, as the vast majority of vehicles in the world's largest automobile market are manufactured in this country. China imports about 1 million cars a year, less than 5% of a market representing 27 million vehicles per year.

Last year, Ford Motor Co. imported just over 30,000 US cars. BMW AG has reduced imports and recently doubled the number of locally produced vehicles. Daimler AG is also planning to increase its stake in its Chinese joint venture, Bloomberg News reported Tuesday. Certain foreign-made models, such as Benz GLE and those sold by Tesla Inc., would suffer a shock if tariffs were reduced. But the opportunity for foreign car manufacturers lies mainly in manufacturing in China.

What's more important for the industry is the US import duties of 25% on steel and 10% on aluminum that came into effect in March. Given Trump's political commitment to revitalize the US steel industry, these are probably here to stay. Temporary exemptions for Mexico and Canada continued in May.

The overall goal was to raise metal prices by limiting imports. The Trump Executive Order has set a capacity utilization target of 80% for aluminum and US steel, and if one country obtains a tariff waiver, it would do so at the expense of others, as noted by the United States. Analysts at Nomura Holdings Inc. Prices have risen relative to those of China and Europe, leading to higher profits for US steel producers. Some have raised wages while others have announced new plants.

But all this has had a major cost for the automotive industry. The amount of steel or aluminum used in a car depends on the type of car and its construction: the sedans are lighter, the chassis and bodywork are more or less a piece, while the SUVs and pickup trucks – more and more popular in the US – are chassis-based and heavier. This means that the steel content could reach 70% of the weight of an average car. The total cost of raw materials has risen from about $ 800 per unit to over $ 1,000.

For General Motors Co. and Ford, it will be painful. GM, which produced more than 2 million vehicles last year, could see its operating profit reduced by $ 500 million while the impact on Ford could be close to $ 510 million. according to a Nomura analysis. US automakers are expected to be the most successful, as their Japanese and South Korean peers are less affected.

These tariff costs will only increase. In the US market, which represents a plateau, more than 70% of vehicles sold are now SUVs and vans. Faced with increasing cost pressures, manufacturers will try to push passengers in sedans or will be under pressure to take shortcuts (read: defective airbag pumps, wiring problems and reminders).

Trump's prices are going to hurt a lot at home. Companies like GM have already had to announce restructuring and job cuts. Ford may have to make even bigger cuts, analysts said. For all the jobs that could be created for steel workers, the auto workers will lose more.

Anyone who hopes that the reduced rates in China will save the American builders should think again.

To contact the author of this story: Anjani Trivedi at atrivedi39@bloomberg.net

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is an editorialist of Bloomberg Opinion which covers industrial companies in Asia. She previously worked for the Wall Street Journal.

© 2018 Bloomberg L.P.

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