Trump’s trade war tariffs will thwart Chinese carmakers’ dreams of breaking America, analysts say

  • Improved manufacturing techniques had finally given Chinese carmakers the potential to compete in the US … but then the trade war came along
PUBLISHED : Saturday, 17 November, 2018, 8:01am
UPDATED : Tuesday, 20 November, 2018, 3:11pm

For China’s car manufacturers, clinching the title of “world’s most productive” is a goal long since attained. The country has been by far the biggest auto market on the planet since 2010.

But a decade-long drive to replicate that success on the international stage has so far failed to bear fruit. Just 3 per cent of the vehicles produced in China were shipped overseas last year.

The big dream was always breaking the American market, and indeed the number of cars exported there had been increasing rapidly in recent years. Now it seems the trade war may have spoiled the party.

“The dream of landing on the American market will never come true for Chinese carmakers,” said Cui Dongshu, secretary general of the China Passenger Car Association (CPCA).

“Globalisation is no longer a topic for Chinese carmakers because no real progress has been made over the past decade.”

Just a few years ago, Chinese carmakers were not ready to enter the US market, in the face of strict safety standards and a lack of brand awareness.

But thanks to improved manufacturing techniques and various marketing campaigns, Chinese carmakers had become poised to at least start to compete in the US.

China’s auto exports to North America stood at about 100,000 units in 2017, according to the China Association of Automobile Manufacturers, accounting for 12 per cent of all vehicle sales abroad. That was a fivefold increase from 2014.

The fear now is that it is only a matter of time before cars find themselves on the expanding list of Chinese items to face punitive tariffs when they land on US soil.

“Before, those leading Chinese carmakers would set their sights on the US market as they expressed their desire to become global competitors,” said Peter Chen, a Shanghai-based engineer with US car component maker TRW. “But the tariffs would make it difficult for them to fulfil their dreams.”

China is by far the world’s largest auto market, producing about 29 million vehicles in 2017, up 3 per cent from a year earlier.

It exported 891,000 of those in 2017, up by a quarter from the previous year, according to the China Association of Automobile Manufacturers (CAAM).

Efforts to push Chinese cars overseas began more than 10 years ago when a clutch of domestic companies including Brilliance China Automotive Holding, Chery Automobile and BYD revealed they harboured ambitions of selling cars outside the mainland.

In 2005, Geely chairman Li Shufu struck an optimistic note at the Detroit Auto Show, announcing that the Zhejiang-based privately-owned carmaker would sell its vehicles in the United States within just two years.

In 2007, Geely, which now owns Volvo Cars and a 9.7 per cent stake in Daimler, had an annual capacity of 220,000 vehicles. It sold 1.25 million units in 2017, a jump of 63 per cent from the previous year.

Unfortunately, that growth was powered by domestic demand and sales of Volvo and Daimler cars overseas, particularly in the US.

“Geely proved to be a pioneering Chinese carmaker in terms of globalising its businesses, but it has yet to record sales of Chinese branded vehicles in the US,” said Yale Zhang, the managing director of industry researcher Automotive Foresight. “The US auto market is crowded with strong rivals and it is no easy job for a Chinese player to compete in that market.”

Indeed, 2017 was the first time in four years that China’s car exports reported growth.

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In 2012, exports of vehicles topped 1.05 million, an all-time high, but that has since retreated.

Overseas shipments of vehicles have stalled since 2013 because of fierce competition in foreign markets and volatility in foreign-exchange rates.

A stronger Chinese yuan against local currencies could technically make Chinese-made cars more expensive in foreign markets.

In 2015, China’s vehicle exports declined by a fifth from the previous year to 750,000 units.

The auto sector has been one of the bright spots in China’s economy over the past two decades because of a growing middle-class that views cars as an essential part of life.

Sino-foreign joint venture auto makers and home-grown companies have ramped up their production to meet the soaring demand from mainlanders, with product prices ranging from about 50,000 yuan (US$7,200) to nearly a million yuan.

To display their increasing manufacturing might, domestic companies have also set their sights on the global market, armed with a strong belief that mainland-made cars would eventually be able to challenge international big names worldwide.

Last year, Great Wall Motor, maker of China’s bestselling sport-utility vehicle (SUV), said it was targeting sales of 100,000 vehicles overseas by 2020 and seeking to set up a plant in North America.

Wei Jianjun, chairman of the Hebei province-based carmaker, told the South China Morning Post at that time Great Wall had confidence in securing a foothold in the international market buoyed by upgraded manufacturing and development capabilities.

Its first overseas product line in Russia is expected to be operational next year.

The chairman said he had visited Mexico and three states in the US to study the feasibility of producing cars there, but policy uncertainties in the US had deterred him from making a decision.

The US-China trade war has yet to have an impact on the mainland’s auto exports to the US since no additional tariffs have been levied on Chinese-made cars bound for the US market.

But Cui said the US would take action on Chinese-made cars if the trade war were to escalate.

Last year, 12 per cent of the country’s auto exports, about 100,000 units, were sold in North America including the US and Mexico, according to the CAAM.

Among them, General Motors’ joint venture with Shanghai-based SAIC Motor sold 42,000 Envision SUVs in the US as the American auto giant halted production of the model at home, only importing the them from China.

In the first three quarters of this year, 22,617 Envision SUVs were sold in the US, according to GM.

“As production on the mainland increases, those mainland-based joint venture car builders using the foreign brands will help shore up Chinese auto exports,” said Qian Kang, a Zhejiang-based entrepreneur dealing with car component businesses. “But China’s own auto companies have to double their efforts to enhance their competitiveness in the global market.”

In April, Beijing announced it would scrap foreign ownership limits on local car firms, a move designed to further open the mainland market to overseas investors.

The investment cap of 50 per cent for a foreign partner in a joint venture carmaker on the mainland will be lifted by 2022, the National Development and Reform Commission said.

The deregulation will probably reduce the profits a Chinese firm can make from its joint venture.

“After all, the overseas shipments of the locally built cars are foreign brand vehicles,” said Qian. “As they increase their stakes in the joint ventures or even set up wholly-owned plants, the exports of foreign brand cars have nothing to do with China’s own auto industry.”

Chinese carmakers now focus on underdeveloped markets such as Iran, Mexico, Southeast Asia and Brasil where the low-priced models are able to vie for a share buoyed by consumers’ growing demand.

“North America is not a key market for Chinese carmakers,” said Cui. “In those markets such as Iran where the government has a fraught relationship with the US, Chinese companies have better opportunities.”

Last year, 232,000 Chinese-made vehicles were sold in Iran, accounting for more than a quarter of total auto exports.

Beijing’s ambitions of creating a new global economic order through the “Belt and Road Initiative” is emerging as a new growth driver of sales of Chinese-made cars.

About 60 per cent of China’s car exports are bound for countries along the route of the belt and road countries.

The initiative, introduced by Chinese President Xi Jinping in 2013, aims to connect land corridors and sea routes to bolster China’s trade ties with 65 countries.

Beijing pledged to invest at least 780 billion yuan to build power plants, roads, ports and other infrastructure in those countries to create a “New Silk Road”.

Chinese manufacturers including carmakers will be the top beneficiaries of the spending spree on infrastructure projects because they can partner with the state-owned builders to tap local markets.

For example, when a state-owned company develops a mega project, it might also build related commercial properties that can be leased to Chinese carmakers to set up their local dealerships.

“Banking on the ‘Belt and Road Initiative’, we have big opportunities to expand fast in the Middle East, Southeast Asian and West African markets,” Yu Jun, president of GAC Motor, said in a statement to the Post. “We aim to promote the awareness of our Trumpchi brand in those markets during some grand events arising from the initiative.”

GAC has sold its cars in countries like Kuwait, Qatar and Jordan.

It has also set up a branch in Russia to expand its sales there.

Back at home, auto sales on the mainland are set to contract for the first time since 1992 as consumers tighten their spending amid concerns that the worsening US-China trade relationship will dampen the domestic economy.

Vehicle sales in September fell 11.6 per cent from a year ago to 2.39 million units.

Analysts had been expecting a gain for the month, with an average forecast of a 5 per cent rise.

In the first nine months of this year sales rose 1.49 per cent to 20.49 million vehicles, but analysts predicted a drop in the full-year figure because the downward momentum would continue in the last three months.

“The weak domestic sales will prompt some of the manufacturers of low-end cars to increase sales of their cars outside the mainland,” said Zhang. “They will be looking for international sales to survive the downturn at home.”