President Donald Trump has a thing for legacy industries, with cars, crops and coal ranking atop his list of priorities. So China is playing very nice when it pledges to cut auto tariffs and buy more soybeans. But the concessions benefit U.S. carmakers such as GM (GM) and Ford (F) less than you might imagine.
Chinese Vice Premier Liu He promised to slash auto import duties from 40% to 15% in a phone call with U.S. Treasury Secretary Steve Mnuchin and U.S. Trade Representative Robert Lighthizer, according to The Wall Street Journal. It's the first contact between the two sides since Trump and Chinese counterpart Xi Jinping buddied up on Dec. 1 over steak in Buenos Aires, and declared a 90-day truce in their trade war.
The tariff cut is now reportedly resting with the Chinese cabinet, expected to review it within the next few days. It's a concrete advance on Trump's tweet out of Argentina that "China has agreed to reduce and remove tariffs on cars coming into China from the U.S.," a claim his staff had struggled to explain.
Beijing may now push for a reciprocal move. The United States currently charges a 27.5% tax on cars imported from China. That's an obstacle to the international expansion plans for manufacturers such as Geely Automobile Holdings, owner of the Volvo and Lotus brands, and Guangzhou Automobile Group, or GAC -- which, by coincidence, makes the Trumpchi brand.
China is essentially giving back what it had taken away. In July, it cut import tariffs on all foreign passenger cars from 25% to 15%. That change would have applied to U.S. cars, but as a retaliatory move in the trade war Beijing boosted the tariff rate from 25% to 40% for American-made autos instead.
Tesla (TSLA) is the main beneficiary of this latest tax cut. It finds it tough to compete with local alternatives on pricing with tougher sanctions in place, and had said it was absorbing "some" of the impact of the higher duties. Tesla shares are up 46% since hitting a low point in October.
Companies such as Ford and GM have strong joint-venture partnerships in China, meaning they make most of their China units domestically. So they are less concerned about import duties, which could even make their locally made cars more competitive.
Volkswagen (VWAGY) , GM and Nissan (NSANY) all get more than 25% of global sales within China, the highest exposure in the sector. Conversely, Fiat Chrysler Automobiles (FCAU) and Renault (RNLSY) get less than 10% of sales from China, the lowest exposure in the industry, while Toyota Motor (TM) and PSA, the parent of Peugeot Citroen (PUGOY) , are only just into double digits.
Still, when carmakers look for growth, they turn their heads east. Asian auto sales are generally keeping pace with economic growth, with Asian GDP set to increase 5.5% in 2019 and 2020, according to Standard & Poor's, while Europe and North America both struggle to hit 2%.
Chief among those drivers is China. The Middle Kingdom is now the world's largest car market, representing around one-third of all light-vehicles sales on the planet. It has also been the main source of growth for the global car industry. But that progress has, surprisingly, screeched to a halt this year.
New-car sales fell 13.9% in November, compared with the same month last year, to 2.5 million units, the China Association of Automobile Manufacturers announced this week. That marks the sixth straight month of declines.
Total sales since January are down 1.7%, leaving the industry looking at a likely 3% drop for the year, according to the association. It would be the first contraction since 1990.
Standard & Poor's attributes the slowdown to pessimism over China's economic prospects and the tighter credit conditions enforced by Beijing. Retail buyers are finding their purchasing power diminished, and sentiment isn't helped by the selloff in equity markets.
The authorities give back as well as take away, however. China this week also posted much worse exports and imports for November than expected. Each negative number increases the likelihood that Beijing will inject stimulus into the economy.
The Chinese government is also encouraging the switch to electric and other eco-friendly technologies. Companies such as BYD, China's top electric-car brand, would therefore benefit from incentives to retire gas guzzlers and replace them with green alternatives. Aspirational upgrading of conventional cars should combine with ambitious environmental targets from the government, particularly in the Tier 1 cities, to support volumes over the next 12 to 24 months, S&P predicts.
If it gets really scared about the economy, the Chinese government could reinstate incentives for all car sales, as it did to support the market in 2017.
It is Chinese car manufacturers, not U.S. ones, that are suffering the most with Chinese sales. Chinese carmakers Dongfeng Motor Group and BAIC Motor have both suffered double-digit sales declines so far this year.
They are struggling to compete with foreign rivals as those brands cut prices. Their losses have turned into gains for Toyota Motor, Daimler (DDAIF) and Volvo Cars (VLVLY) , which have all boosted sales in double digits through the first 11 months of the year.