What China's Proposed 50% Cut To Car Purchase Tax Could Mean For Automakers

Nio Inc - ADR NIO, China’s fledgling electric vehicle manufacturer, temporarily surged Monday on news of a potential cut to auto taxes in its home country.

The Would-Be Catalyst

China’s National Development and Reform Commission proposed a tax abatement to stimulate the nation’s faltering auto industry. Sales have declined four consecutive months amid the U.S. trade war.

The proposal would halve the tax on vehicles with engines smaller than 1.6 liters, according to Bloomberg. The plan would bring the rate down to 5 percent, increase buyer spending power and heighten vehicle demand.

Considering the effects of a comparable cut made in September 2015, analysts anticipate a 2-2.5 million-unit increase in industry guidance, which could drive mid-single digit growth in the sector rather than an expected decline.

What It Means For Automakers

A tax cut in the world’s biggest car market would be a major boon for foreign and domestic automakers.

Ford Motor Company F has floundered in the region in the last five quarters, with September sales dropping 43 percent year-over-year and market share contracting throughout the third quarter.

CFO Bob Shanks said Chinese tariffs have shrunk 2018 profits by $1 billion so far, and he forecast another $200 million in impending costs.

Dearborn recently refocused its foreign efforts and last week structured the China segment as a standalone unit — that is, one distinct from the general Asia Pacific operations — in an effort to stimulate profitable growth.

"China is absolutely essential to Ford's profitability and growth," Jim Farley, president of global markets, said in a statement. "As the largest vehicle market in the world, China commands its own leadership and focus."

General Motors Company GM, which recently celebrated unexpectedly strong performance in the market, forecast near-term challenges from seasonality, luxury pricing and exchange-rate pressures. Given its plans to ramp electric vehicle sales in the region, the tax cut would serve GM well.

Tesla Inc TSLA would see similar benefits, as China represents 15 percent of its total 2018 sales volume.

The electric vehicle maker noted in its third-quarter earnings that Chinese tariffs could cut $50 million out of fourth-quarter gross profits. The automaker has attempted to circumvent the trade war effects by shifting Model 3 production phases to China. It also committed to construct a Shanghai factory and third Gigafactory in the region.

If the automakers profit from China tax relief, so do their suppliers.

Aptiv PLC APTV, Adient PLC ADNT, Visteon Corp VC, BorgWarner Inc. BWA, Delphi Technologies PLC DLPH, Lear Corporation LEA and Garret Motion Inc GTX surged briefly with Nio on Monday’s news.

Nio shares were down 3.72 percent at $5.96 at the time of publication Tuesday. 

Related Links:

General Motors China Tax: Good Or Bad?

China Cuts Car Tariffs, But That May Not Advance The 'America First' Theme

Photo courtesy of Nio.