John Zeng, Director, China Forecasting
24 May 2018
24 May 2018
Impact of import duty cut on Chinese vehicle market
The Chinese government announced on 22 May that the customs duty for CBUs will be reduced from 25% or 20% to 15% from 1 July this year, and that the duty for auto parts will be cut simultaneously to 6%.
This adjustment means that Passenger Vehicles (PVs) will be taxed at 15% from July, instead of the current 25%, leaving the industry wondering how the overall PV market be impacted. The key question is whether the tax cut will stimulate demand for imported vehicles, to the detriment of locally produced models.
If we turn our attention to the insurance data, it becomes obvious that imports are essentially a niche market in China. Around 1.13 million imported vehicles were registered in 2017, accounting for just 4.3% of the overall PV market. If we compare this to the 25 million domestic models registered last year, it is difficult to envisage any substantial impact from the import sector on the domestic vehicle market.
“battery electric vehicle makers like Tesla will benefit more from the duty cut as there is no consumption tax on electric models”
How will the new duty cut affect the retail price of imported cars? To answer this question, we must consider the cost build-up of an imported model. Imports are subject to customs duty, VAT and consumption tax. Customs duty and VAT rates are fixed, with the latter set at 16%. Consumption tax rates are variable, however, and depend on engine size: the bigger the displacement, the higher the consumption tax. Note that last year, almost 50% of all imported vehicles had engines displacements of more than 2.0 litres.
Comparison of Imported Car Costs Inclusive of Duties and Taxes
Note: The consumption tax rates for 1.0-1.5L and below 1.0L are 3% and 1%, respectively.
As highlighted above, the price gap, inclusive of duties and taxes, under the two schemes is around 8%, which is unlikely to impact the current price structure in the PV market to any great extent. It is worth pointing out, however, that battery electric vehicle makers like Tesla will benefit more from the duty cut as there is no consumption tax on electric models.
Another key factor to take into account is the parallel-import scheme. This has been in place in China for two years now and means that the retail price of parallel-import models is already 15% to 30% lower than the MSRP. Parallel-import car sales rose by nearly 30% to 172,000 units last year, accounting for more than 14% of the total import market. An 8% price adjustment on the MSRP will therefore have a fairly limited bearing on the market, given the competitive strength of parallel imports.
“our view is that the customs duty cut will stimulate the import market”
Most Premium brands have already localised a significant proportion of their main products in China, with more models set to follow suit. Not only do locally built vehicles have a significant price advantage compared to their imported counterparts, but localisation can offset the risk of trade friction between countries. In previous years, this growth in localised production made a sizeable volume impact on the import market.
All things considered, our view is that the customs duty cut will stimulate the import market, particularly for those brands that rely entirely on imports such as Lexus. It will not, however, alter the structure of China’s overall Passenger Car market as its impact on retail prices will be nominal.