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  7. The Sino-US trade "truce"...

[YesAuto News] On December 1, the Sino-US trade war finally ushered in a turning point. In Buenos Aires, Argentina, the heads of state of China and the United States held a historic dinner meeting. According to State Councilor and Minister of Foreign Affairs Wang Yi, the meeting was friendly and frank. It lasted two and a half hours, which was far beyond the scheduled time. The two sides reached a consensus to stop imposing new tariffs.

The US also issued a statement stating that the US originally imposed tariffs on US$200 billion of Chinese goods will remain at 10% after January 1, instead of the 25% previously announced. The two sides will step up negotiations. Once an agreement is reached through negotiations, all tariffs imposed since this year may be cancelled.

The Sino-US trade war has thus entered a new stage, which is undoubtedly a piece of good news for the auto industry. Since the Sino-US trade war, the auto industry has been hit hard. This not only affects the import of branded models produced in the United States into China, but also hinders the progress of Chinese brands in going global. Then, with the further improvement of the trade relations between the two countries, can the auto industry run in time?

●Accelerate Chinese brands to the high-end market

With the key node of the 40th anniversary of China's reform and opening up, Chinese auto brands have also gone through an extraordinary 40 years. During this period, the strength of Chinese brands increased rapidly, and they competed fiercely with joint venture brands in various segments. In addition to competing in the domestic market, “going out” has become a new battlefield for Chinese brands.

According to data released by the China Association of Automobile Manufacturers: in 2017, my country exported 891,000 vehicles, an increase of 25.8% compared with the 708,300 vehicles exported in 2016. Among them, Chery, Jianghuai, Great Wall, Changan and other brands have become the main force in the export of Chinese auto brands.

Although China's auto export volume continues to grow, the current models exported overseas are still dominated by low-end cars, and the export structure is mainly dominated by economically underdeveloped regions. This situation can easily adversely affect the brand image or hinder the brand image. In the future, overseas sales of high-end Chinese models will break through.

In order to further build brand influence, Chinese car companies are gradually launching mid-to-high-end brands, and intend to challenge the US market, which has strict regulations, fierce competition, and the highest barriers to entry. The reason behind it is that only by withstanding the test of developed countries can it be more conducive to enhancing brand competitiveness.

However, the “ambition” of Chinese brands to achieve globalization is not smooth. Prior to this, GAC Group intended to enter the US market. For this reason, it not only established GAC Silicon Valley R&D centers in Silicon Valley and Detroit, but also established a forward-looking design center in Los Angeles. It even launched a 7-seater model to meet the needs of the US market. Unexpectedly, after U.S. President Trump announced “imposed tariffs and restrictions on products imported from China”, Sino-US auto trade will also be affected, causing GAC Group's plan to enter the US market to be temporarily suspended.

With the reconciliation of the trade relationship between China and the United States, it has created new opportunities for Chinese brands to “go global”, which is conducive to making a splash in the international market. A more positive sign is that on the second day of the Sino-US trade truce, Chinese auto stocks ushered in a large-scale increase and market risk appetite has improved.

●Relieve pressure on foreign auto companies in China

In fact, the shot of the Sino-US trade war has more of a greater impact on auto brands produced in the United States. Including all models of Tesla, Mercedes-Benz GLS, Mercedes-Benz GLE, BMW X4, BMW X5, BMW X6, BMW X7, Ford Mustang, Explorer, F-150 and other models, these models have to increase purchases when they are imported into China cost.

Although many brands have a small sales share in the Chinese market, for brands such as Tesla and Lincoln that rely 100% on imports to enter the Chinese market, it is full of crises. At the same time, all car companies have different degrees of “trauma”.

◆Tesla: multiple price adjustments affect sales

In mid-May this year, the Ministry of Finance of China announced that the tariff on imported cars would be reduced from 25% to 15% starting from July 1. Tesla responded quickly and announced a reduction in the prices of Model S and Model X in China within a few hours, ranging from 48,300 yuan to 90,000 yuan. However, the good times did not last long. Due to the adjustment of China’s import tariff on the United States from 15% to 40% on July 6, Tesla took the lead in raising the price of all models sold in China, and then in mid-August. Take the initiative to increase prices.

After experiencing “one drop and two rises”, Tesla's sales in China this year have fluctuated. In the third quarter, sales in China were 3,169, a sharp drop of 37% from the same period last year. In October, sales fell by 70% to 211. To this end, Tesla has to bear most of the tariffs to help customers reduce the cost of buying cars. The official website announced that starting from November 22, the price of products in China will be reduced by 12% to 26%. In addition, the trade war has also accelerated the pace of Tesla's localization. An investment agreement was signed in July. In October, it successfully acquired land and plans to spend 2 billion US dollars to build a Shanghai super factory. At the same time, it also plans to openly recruit more than 30 positions such as production supervisors from the public.

◆Lincoln: Speeding up the process of localization

Lincoln Motors predicts that due to the Sino-US trade dispute, by 2020, the company's annual global sales will not reach the target of 300,000 vehicles. At the same time, Lincoln Motors plans to realize the localization of five new cars in China in 2022 to reduce costs and increase sales, and is seeking to speed up the localization process.

At present, Lincoln's main models exported to China are: Lincoln MKZ, Lincoln MKC, Navigator, Lincoln Continental and Navigator. Among them, the new Lincoln Aviator will be made domestically in 2019; Lincoln MKC and Lincoln MKZ will follow closely; the Voyager will be made domestically in 2021.

◆GM: Closing 7 major factories arouses dissatisfaction with Trump

A few days ago, GM stated that in the face of the stagnation of the traditional gasoline-powered car market, GM will reduce the production of slow-selling models and lay off 15% of its employees by the end of next year. The number of layoffs may reach 14,700, and stop at the same time. The production of seven factories, including North America, will shift more funds to electric vehicles and self-driving cars.

General Motors originally intended to seek development through “slimming”, but Trump was furious because of this. In an interview with The Wall Street Journal, he said, “General Motors CEO Mary Bora is required to stop manufacturing cars in China and start production in Ohio, USA. Add a new factory to replace the five factories that GM Group plans to discontinue.”

◆Acura: Shifting U.S. production capacity to China

The trade war also involves Japanese brands produced in the United States. According to foreign media reports, Honda's high-end brand Acura intends to transfer its American production capacity to China, and its Acura RDX (import) models will be shared by Guangqi Honda and Dongfeng Honda. Although the domestic Acura RDX was officially launched on November 6, the previously sold Acura RDX (imported) were all produced in the United States.

◆BMW: Lower annual profit target

A few days ago, BMW said that due to its failure to achieve the full-year target for its pre-tax profit to be the same as last year, it will lower its expectations for automobile profit margins, mainly due to the impact of the escalation of global trade conflicts and the latest emission regulations implemented by the European Union.

The current operating profit margin is conservatively estimated to be 7%, which cannot maintain the same trend as last year's 8-10% annual profit. Affected by this news, BMW's stock price plunged 6.1% in intraday trading, the largest drop since Brexit in 2016.

◆Volvo: postpone IPO plan

As early as May this year, Bloomberg reported that Zhejiang Geely Holding Group has selected three major banks, Citibank, Goldman Sachs and Morgan Stanley to help Volvo Cars IPO this year. The valuation is expected to be between US$16 billion and US$30 billion.

However, due to the general decline in the stock prices of auto companies due to Sino-US trade frictions, Zhejiang Geely Holding Group has postponed the listing plan of its Swedish luxury car manufacturer Volvo. Although the announcement of the IPO plan is “stranded”, Volvo still said that the possibility of listing will not be ruled out in the future.

From a certain perspective, the Sino-US trade war has promoted the investment of foreign brands in China to a certain extent. But it needs to be admitted that this also affects the development strategies of some car companies and disrupts their established pace. It is foreseeable that the Sino-US trade truce can ease the pressure on foreign auto companies, especially U.S. auto companies in China, and promote the steady development of trade between the two countries.

Edit summary:

After half a year of trade war, foreign brands have become more aware of the important impact the Chinese market has on the world auto industry, and understand that the final result of the trade war will only hurt both sides. From this point of view, only openness and integration among major auto countries will be more conducive to promoting the development of the auto industry and ultimately achieving a win-win situation.

It is worth noting that there is only a 90-day truce between the two sides. This means that if China and the United States cannot reach an agreement on compulsory technology transfer, intellectual property protection, and non-tariff barriers within 90 days, the United States will still raise tariffs. Then, the next 90-day buffer period will be a critical period for China and the United States to negotiate and play games.