New Duty will Likely Not Impact Chinese Consumers Who Want Luxury Imports

Tim Dunne

I appreciated recent comments from one of our readers, Tim S. from Wisconsin, about a post “New China Duty Only Impacts Makers of Vehicles with Larger Engines” on the minimal impact of a new duty that has been imposed by the Chinese government on cars imported from the U.S.

I want to address some of the reader’s questions and concerns.

First, what percentage of vehicles with larger engines are produced in China by General Motors and Ford? Between GM and Ford, approximately 99% of the vehicles they produced in China in 2011 were fitted with sub-2.5-liter engines.

As for GM and Ford vehicles that are exported to China from the U.S., I would guess (the data is not readily available) that nearly the opposite is true, and that nearly all are fitted with engines greater than 2.5 liters. But let’s put things into perspective: In 2011, GM and Ford built and sold nearly 1.6 million vehicles in China, but their combined exports to China from the U.S. were only some 35,000 vehicles (or a ratio of 50-to-1 of locally built vs. imported vehicles.)

Price is Not a Consideration to Wealthy Consumers in China

The reader, a Wisconsin resident, pointed out that there was a 10% luxury tax on large boats in the U.S. that caused many dealers to go out of business. In conclusion, he suggests that “the wealthy in China have lots of options” including buying other brands that are not hit as hard by the tariffs.

I have to admit that I don’t remember much about the 10% luxury boat tax of 1991; I guess that wasn’t on my radar at the time (too young and impecunious). But I have spent a substantial amount of time in China, and my experience has been that if a wealthy Chinese consumer sees something he/she likes, price is not a consideration.

In fact, the higher the price, the more attractive a product frequently becomes, because others will know how much was paid for it. To paraphrase American writer F. Scott Fitzgerald, the rich in China are not like the rich in the U.S.A. And considering there are now more than one million “US-dollar” millionaires in China, up 33% from 2010 and from practically none 10 years ago, I don’t think disposable income is a challenge for wealthy Chinese.

Most Chinese Auto Imports are European Brand Models

Our reader is right about the fact that Chinese consumers have lots of options (more vehicle brands and models are sold in China than any other country in the world). But of the approximately 13.1 million passenger vehicles sold in China in 2012, only about 800,000 vehicles (6% of the total) were imported. We know from China government data that the majority of Chinese imports come from Europe (principally Germany) and Japan. The majority of these vehicles are flagship sedans like the BMW 7 Series, Audi A8, Mercedes-Benz S-Class and Lexus LS.

To be sure, the 35,000 vehicles that GM and Ford exported to China in 2011 is welcome bonus business for those companies—likely worth more than $1 billion in revenue—but a) it’s not clear yet how much of a negative impact the extra duty will have on these exports; b) any decline in the number of these exports is not going to make or break GM or Ford’s businesses in China; and c) it’s not even clear if the new duty rules will be allowed under World Trade Organization rules. As a result, the new duty is, in my opinion, a pre-emptive political ploy to convince the U.S. to reconsider some of the trade measures now under discussion in the U.S. Congress.Tim Dunne, director of global coordination at J.D. Power and Associates

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