Tesla, Ford Motor brace for Chinese tariffs as trade tensions rise

Beijing is set to impose an extra 25% tariff on American auto imports this week

China fulfilled a pledge to slash tariffs on imported cars Sunday, but the respite for auto makers who export to China from the US will be brief as Beijing prepares to slap an additional 25% tariff on US auto imports this Friday.
 
Ford Motor Co. and Tesla Inc, as well as Germany’s BMW AG and Mercedes-Benz maker Daimler AG —which build premium sport-utility vehicles in the US and ship them to China—stand to suffer the most. They will be forced to charge consumers more, or absorb the added costs, as their rivals take advantage of the reduced tariffs to lower prices.
 
Beijing announced in May that it would reduce tariffs on imported cars from 25% to 15%, in what was widely viewed as a concession to defuse trade tensions with Washington. But in recent weeks both countries have edged closer to a full-scale trade war. Auto makers are caught in the crossfire, jeopardizing their sales in the world’s largest auto market.
 
“It’s essential that governments work together to lower, not raise, barriers to trade,” said a Ford spokesman. “We encourage both governments to continue to work together through negotiation to resolve issues between these two important economies.”

The additional 25% tariff taking effect Friday on American automotive products and agricultural goods was announced by China after the Trump administration said it would impose tariffs on $34 billion of Chinese goods, including machinery and home appliances—also starting Friday.
 
US President Donald Trump has proposed a series of sanctions against China in response to what he says are its unfair trade practices. China disputes those claims, and Chinese President Xi Jinping recently told a group of mostly Western business leaders that he intends to fight fire with fire.
 
China’s steep tariffs on imported cars have led most foreign auto makers to build cars through joint ventures with Chinese partners to evade the tariffs. But imports are a lucrative business for premium and luxury auto brands. China imported 1.2 million cars last year, according to the China Automobile Dealers Association, or about 4% of the vehicles sold in China. Imports are especially popular in affluent cities such as Beijing and Shanghai, where imported Porsches, Teslas and Mustangs are common sights.
 
Car companies that import vehicles made in Europe or Japan, such as Porsche AG and Lexus, still stand to gain from the original tariff cut. But those that import vehicles from the US now face a 40% tariff, rather than the 15% rate they had briefly expected. BMW and Daimler import more cars to China than any of their rivals, each having sold over 180,000 imports in China in 2017, comprising a mix of U.S.-built SUVs and European-built sedans. Daimler warned investors in June that the likely fall in premium SUV sales in China caused by higher tariffs would hit its bottom line. Some auto analysts expect other auto makers to follow suit and lower their earnings expectations. A BMW spokesman said the company built over 371,000 vehicles at its Spartanburg, S.C., plant last year, of which 70% were exported. A quarter of the SUVs exported from the plant went to China, more than any other market, he said. “Barrier-free access to markets is therefore a key factor not only for our business model, but also for growth, welfare and employment throughout the global economy,” he said. Audi AG, BMW’s rival in the premium segment, only exports cars built in Europe, so it can still capitalize on the lower tariff rate.
 
Cars built in Europe only account for around a tenth of Audi’s sales in China—compared with over 30% for both BMW and Daimler—and company executives say they aim to grow sales significantly.
 
Ford sold nearly 65,000 Lincoln vehicles exported to China last year, as well as nearly 19,000 Fords. It has plans to start building Lincoln cars locally from 2019, but until then its sales are likely to be dented. Lincoln had been a rare bright spot for Ford in China, with Ford’s sales falling 22% here in the first five months of this year.
 
Janet Lewis, Macquarie Capital Research’s managing director of equity research, said she expects Lincoln sales could suffer more than rivals “as its brand value is lower than the German premium brands.” While General Motors Co. only imports in tiny volumes, Tesla sold roughly 17,000 cars in China last year, making the country its second biggest market after the U.S. Tesla also has plans for a local factory, but that is unlikely to be up and running before 2021. Importers of US-built cars, including Tesla, had promised price cuts which are now likely to be reversed. The price of a Tesla Model S in China was set to fall from around $114,400 to $107,100. Instead, it will now increase to roughly $125,300, assuming Tesla passes on the whole tariff increase to its customers. “Tesla customers are likely less price-sensitive due to the unique nature of the product,” Ms. Lewis said, though the higher tariffs could still translate into lower margins for the electric-car specialist, which last year booked over $2 billion in China sales.
 
Tariffs are linked to cost and import prices, not retail prices, meaning that the previous 25% tariff typically constituted around 15% of the retail cost of a car imported into China.
 
In its recent earnings guidance, Daimler said it would not pass on the full cost of the tariff increase to its customers. A Daimler spokeswoman said the company favors free trade and open markets, but wouldn’t “speculate on the tariff discussion.”
Source: The Wall Street Journal