Auto Industry

The road ahead

Should foreign carmakers be worried about the outlook of 2017?


Made in China: the Guangxi plant of GM’s joint venture with SAIC

“Another tweet about Taiwan [by Donald Trump] and then General Motors (GM) will be in big trouble.” So confided an anonymous European car manufacturer to Forbes in December, flagging its belief about the American company’s vulnerability to rising economic protectionism disrupting Sino-US relations.

The likelihood of a trans-Pacific trade war is shaping up to be one of the overriding themes of 2017. And many thought they spied the opening shots from China a few weeks ago when the Shanghai branch of the National Development and Reform Commission fined GM Rmb201 million ($28.9 million) for monopolistic practices.

Since China is hugely important for the US company, accounting for roughly a quarter of its global profits (GM sold 3.4 million cars in the first 11 months of 2016, up 8.5% year-on-year), Forbes wondered if China’s move was in retaliation for the US President-elect’s undiplomatic telephone call to Taiwan’s leader a week or so earlier (see WiC349).

Not so, according to the Economic Observer, which said the investigation had begun last April and only wrapped up in November.

The NDRC concluded that GM’s Shanghai-based marketing arm had been colluding with local dealers to impose minimum prices for its Cadillac SRX, Chevrolet Trax and Buick New Excelle brands. Dealers that didn’t comply were punished, missing out on hotter models.

The fine is the sixth that has been levied over the past few years against foreign car manufacturers including BMW, Mercedes, Audi, Chrysler, and Nissan. It is less than Mercedes’ Rmb357 million and Audi’s Rmb249 million penalty, and represents just 4% of the sales volume of the GM brands targeted.

The editor of Automotive News China believes it would be hard for Beijing to respond to Trump’s threatened tariffs by imposing any of its own on GM since the company makes nearly all of its China-bound cars domestically already. Others, however, have suggested GM’s bottom line could still be damaged by an anti-American consumer backlash similar to the one Japanese carmakers experienced in 2012 after their country’s spat with China over the disputed islands known in China as the Diaoyus and in Japan as the Senkakus (the carmakers slashed their sales forecasts by 650,000 units that year; see WiC174). However, anti-Japanese sentiment in China has very specific roots relating to the Second World War, which do not apply with the same ferocity to the US.

Ironically, 2017 might be the year when American automakers see an end in sight to the joint venture straightjacket they have been held in since 1994, when the Chinese government first imposed its 50% shareholding limit. Signs of change first emerged last June, when NDRC Chairman Xu Shaoshi suggested the ceiling could be scrapped.

As a first step the NDRC introduced a pilot project one month later. This enabled some auto parts manufacturers to set up facilities without joint venture partners in free trade zones. In December, the government announced it was expanding the pilot project nationwide and also adding electric vehicle battery manufacturers to the list of foreign companies which do not need a local partner.

Back in 2014, the sector’s industry body, the China Association of Automobile Manufacturers (CAAM) said it was vehemently opposed to any reduction in the cap, which would ‘kill domestic manufacturers in the cradle’.

More recently it has suggested a five-year to eight-year timeline to remove it. But in December, Ministry of Commerce official Zhang Jianping argued in favour of opening up the auto market – so as to force domestic manufacturers to compete on a level playing field.

Yale Zhang, managing director of Automotive Foresight, a consultancy firm, tells China Daily he agrees. He believes China should announce a 10-year timeline to remove the 50% limit, giving domestic manufacturers time to prepare, but also a hard deadline that focuses them on meeting the challenge. As China Daily reports, seven of the top 10 passenger car manufacturers by sales are Sino-foreign joint ventures, with only three fully domestic operators making the list (they are Chongqing Chang’an, Geely and Great Wall Motor).

In the new energy vehicle (NEV) sector it is the other way round, with domestic manufacturers including Geely holding a 95% market share. One of the big ‘ifs’ for 2017 is whether Tesla will finally be able to make inroads into China. So far it has not even been able to meet its 2015 Chinese sales target of 10,000 vehicles. In 2016, analysts believe it will sell about 6,000 NEVs in China compared to 80,000 globally. This is also just a fraction of China’s top selling NEV, the BYD Tang, which had notched up 29,855 in sales during the first 11 months of 2016.

In 2015, China overtook the US and Europe in annual NEV sales. In 2016, it is likely to have overtaken them in cumulative NEV sales with up to 645,000 vehicles on the road by the end of the year. Tesla may console itself with the fact that even though its cars are subject to tariffs it has still been able to build up a 3% Chinese market share, which is bigger than all the other foreign manufacturers put together.

Under the current regulations the only way Tesla can avoid import tariffs is by setting up a domestic joint venture operation. In 2016, the company said it was looking for a domestic partner and many analysts expect it to set up a Chinese manufacturing facility in 2017. That said, it may wait if it thinks the Chinese government is confident enough in the strength of its domestic industry to dismantle the remaining caps in the NEV sector and allow unfettered competition. Either way, 2017 will be a crucial year for the company as it launches its entry-level vehicle, the Model 3, globally.

A much bigger ‘if’ for the auto industry in general is what happens to auto sales now that China is phasing out its purchase tax incentives. In December, for example, the government announced that the tax for cars with engines smaller than 1.6 litres would rise from 5% to 7.5% at the end of 2016 and then increase to the full 10% in 2018.

As consultancy firm ICIS says, Chinese sales were the main support for the global car industry in 2016 and any slippage will provide the sector’s biggest headwind in 2017. Analysts highlight that previous hikes in the sales tax in 2011 and 2014 led to a drop off in sales after consumers front-loaded purchases to beat the expiration date.

This time round, they don’t expect to see any slippage until March. Some dealers are likely to book some of December’s sales in January, while Chinese New Year falls two weeks earlier than in 2016 (at the end of this month). This means February’s figures are likely to be buoyed by a low base from last year.

HSBC says dealers might try to maintain market share by increasing discounts to offset the tax increase. CICC notes that while average market prices have been decreasing (from Rmb132,400 to Rmb131,200 in November), discounts have also been thinning as dealers sell a higher proportion of domestic brands.

Other analysts believe sales may not contract as badly as they did in 2014 because China is phasing in the tax increase gradually this time round. The consensus view is for 2% to 5% sales growth in 2017.

But this is still a pale shadow of the 21.9% growth the industry registered in the 11 months to November 2016, with Chinese consumers likely to have purchased 25 million passenger vehicles over the whole year. Small cars account for 72% of overall sales in China and the industry as a whole is vitally important to the overall economy.

Yet while small car sales may drop off, larger cars are taking up some of the slack. After registering negative growth early in 2016, sales momentum was strong during the later months of 2016, hitting 12% in November. Domestic brands registered particularly strong growth in the SUV segment, with Geely’s year-on-year sales rising 99% that month.

And if all else fails there is always the possibility of increased leverage. Last week the central bank began a consultation on plans to lift the limit consumers can borrow against a new car’s sticker price above the current 80%.

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