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September 15, 2009

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Home » Business » Auto

Consumers win with tariff cuts

CHINA'S reduction in tariffs on imported auto parts, after it lost a World Trade Organization appeal, may create headaches for the domestic auto industry but could be a boon for foreign car makers and Chinese consumers.

The WTO ruling late last year upheld a complaint from the United States, Canada and the European Union that China's higher tariffs on imported auto parts violated international trading agreements. That ended China's three-year fight to get the complaint overturned.

Beginning this month, China cut the levy on imported spare parts to 10 percent in cases where the parts comprise more than 60 percent of a made-in-China vehicle.

In 2005, China levied a 25 percent tax on the parts if they failed to meet local content ratios, the same duty as imposed on imported vehicles.

Helped development

"The policy had helped domestic auto parts makers for four years during the critical period in their development," said Lang Xuehong, director of the automotive division of consulting and research firm Sinotrust.

The change in tariffs has some industry analysts worried that international auto makers will have more competitive edge, hurting the development of the domestic auto parts industry.

"Now foreign car makers may use the opportunity to lower car prices and introduce new models at a quicker pace, which will benefit domestic consumers," Lang said.

"But it's also probable that joint ventures will have less interest in engineering and production expansion in China in the long term."

China manufactured more than 10 million vehicles last year, with about 80,000 units assembled wholly from imported components. That's down from a high of 400,000 units using the imported parts in the late 1990s, said Jia Xinguang, an independent industry analyst.

The higher tariff on parts introduced four years ago was aimed at preventing foreign car makers from evading taxes on imported cars by importing spare parts in big shiploads.

But foreign car makers argued the higher levies would force them to buy more Chinese-made parts and were also unfair to foreign spare parts suppliers.

Eliminating the additional tariffs may benefit luxury car makers the most.

Mercedes-Benz, Cadillac and other foreign car makers have continually increased the amount of locally made parts used in cars they manufacture in China since demand surged over the past few years.

BMW AG, the world's largest luxury car maker, increased its local sourcing of parts to 4.4 billion yuan (US$619 million) last year from 3.6 billion yuan in 2007 as part of its moves to lower local production costs.

However, foreign auto makers say they often find it hard to source adequate local parts because they are purchasing relatively small amounts and have quality standards that some Chinese suppliers can't meet. Making their own auto parts requires huge capital investment and time.

"The elimination of additional tariffs will lower the production cost for vehicles which used to contain a high percentage of foreign-made auto parts and make them more price competitive in the market," said Sinotrust's Lang.

"New models will also be easier to introduce in China, intensifying competition for domestic rivals," she said.

Some officials from Chinese car makers told Shanghai Daily that they worry the tariff reduction will open the door to a flood of cheap spare parts from India, Southeast Asia and other countries.

Slow parts industry

That means the growing momentum of China's auto parts industry may lose its steam, and the prices for new vehicles may drop further.

The problems for China don't end there. Over the past three years, Chinese auto parts makers have grown larger and stronger because joint ventures invested in their factories, localized supply chains and technology development centers.

An official from Beijing Benz Daimler Corp who declined to be identified said increased use of locally made parts is a must if Chinese car makers are to acquire advanced technologies.

"Do you think foreign partners would be still interested in investing in auto parts segment in China?" he asked.

Other analyst such as Qie Xiaogang, an official from an auto trading market in Beijing, said Chinese auto parts makers may be overreacting.

"Although imported auto parts may rise after the duty adjustment, it is unlikely that car makers will rush into large-scale assembly using imported parts," he said.

"Assembling imported auto parts is more expensive, demands longer shipping times, results in slower market response and exposes the company to foreign currency risks.

"In the long-run, car makers won't change their parts strategies because they are under pressure to keep tight production schedules that require Chinese-made spare parts."

An official from the Ministry of Industry and Information Technology said the central government will closely monitor the spare parts issue but no new policies are expected any time soon.

Some analysts suggested that China could still encourage foreign car makers to use more domestically made components before granting them permission for production in China.


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