GM May Boost China Production Due to Tariffs, JPMorgan Says - Bloomberg Business Week

General Motors Co. may hasten plans for boosting output in China after regulators in the world’s largest auto market said they will impose anti-dumping duties on some vehicles imported from the U.S.

Punitive duties of as much as 12.9 percent for its autos “may accelerate GM’s localization plans,” Himanshu Patel, a New York-based analyst for JPMorgan Chase & Co., wrote today in a note to clients. The Detroit-based automaker already plans to add local production in China and just 1.3 percent of GM’s 2.43 million sales in China last year were imported, he wrote.

China’s decision to increase import levies comes three months after the World Trade Organization rejected its appeal of a ruling backing U.S. duties on tire imports. China’s auto sales are rising at the slowest pace in 13 years, pressuring local producers to consolidate as foreign carmakers post gains.

“The move shows that China is always capable of intervening politically in its markets,” said Juergen Pieper, a Frankfurt-based analyst with Bankhaus Metzler. “The automobile industry is very dependent on China for growth, and there’s doubts about the pace of future expansion.”

Automakers declined on concern higher duties may soften demand in the Chinese market, which LMC Automotive says may rise to 21 million passenger-car sales by 2015. GM fell 3.2 percent to $19.47 in New York trading, the lowest closing prices since its initial public offering in November 2010.

‘Modest Impact’

The tariffs will have a “modest impact” on GM, JPMorgan’s Patel said, because most of the automaker’s vehicles imported to China are low-volume models such as the Buick Enclave and Cadillac SRX sport-utility vehicles.

“Our goal is to build where we sell,” Klaus-Peter Martin, a company spokesman, said in a phone interview. About half of a percentage point of sales in the region come from the GM’s North American plants, he said.

Duties may be as much as 8.8 percent for Chrysler Group LLC, the Auburn Hills, Michigan-based maker of Jeep SUVs, China’s commerce ministry said today on its website. The U.S. units of Bayerische Motoren Werke AG and Daimler AG will face duties of 2 percent and 2.7 percent respectively, it said.

Ford Motor Co. is not affected by the tariffs, Todd Nissen, a company spokesman, said in an e-mail. The only vehicle Ford imports into China is its Edge SUV built in Canada.

2.5-Liter Engines

The taxes announced today affect vehicles with engines that are above 2.5 liters in size, according to the ministry’s website. Honda Motor Co.’s U.S. operations and other automakers the ministry didn’t specify will also be subject to the tax. China currently imposes tariffs of 25 percent on imported cars.

BMW leads automakers that have “material exposure” to the duties with about 25,000 vehicles imported from North America, Itay Michaeli, a New York-based analyst for Citigroup Inc., wrote in a note to clients. Chrysler imports about 24,000 primarily through its Jeep brand and Daimler imports about 18,000, he said.

Fiat SpA, which controls Chrysler, declined 21 cents, or 5.5 percent, to 3.55 euros in Milan trading. BMW fell 5.1 percent to 50.25 euros, while Daimler dropped 3.1 percent to 31.66 euros in Frankfurt.

The WTO in September rejected China’s appeal of a ruling by the organization’s judges last December that found tariffs on $1.8 billion of car and light-truck tires from China were legal. President Barack Obama imposed the duties of as much as 35 percent in September 2009 under a so-called safeguard provision designed to protect U.S. producers from a surge in imports.

‘Flawed’ Investigation

China’s anti-dumping investigation into U.S. autos has been flawed and the U.S. Trade Representative’s office is “disappointed” with the planned duties, Andrea Mead, a spokeswoman, said in an e-mail. The trade office will work with Congress to find the best way to move forward, she said.

“China’s actions are unjustifiable,” House Democrats Sander Levin and Jim McDermott and Republicans Dave Camp and Kevin Brady said today in a joint statement. “This appears to be just one more instance of impermissible Chinese retaliation against the U.S. and other trading partners.” The action “appears” to violate China’s WTO commitments, they said.

BMW and Daimler’s Mercedes-Benz both build sport-utility vehicles at U.S. factories for global export. BMW is expanding its factory in South Carolina to produce as many as 300,000 X5, X6, and X3 SUVs next year from 270,000 in 2011.

The Daimler unit plans to invest $2.4 billion between 2010 and 2014 at its plant in Alabama to add equipment for the assembly of the C-Class sedan. The company currently makes the M-Class and GL SUVs as well as the R-Class wagon at the site. The plant produced 125,400 vehicles in 2010.

‘Flummox’ Buyers

“This is hardly going to flummox the buyer of a high-end car,” said Namrita Chow, a senior analyst at IHS Automotive in Shanghai. They’re really not going to be bothered by a few percent here and there.”

BMW doesn’t expect the new import duties to have a significant impact on its sales in China, Mathias Schmidt, a spokesman, said by phone, adding that the failure to resolve the trade dispute was “regrettable.” Daimler’s Mercedes is reviewing the potential impact from the duties, said Bettina Singhartinger, a spokeswoman.

Chrysler sold 23,482 vehicles in China last year and aimed to increase deliveries to 40,000 this year, the company has said. The automaker declined to provide updated China sales results for 2011. Ariel Gavilan, a company spokesman, declined to comment on what affect the new duties may have on profit.

Sales Pace

China’s passenger-car sales rose at the slowest pace in six months in November, as monetary tightening and the removal of government incentives dented demand. Wholesale deliveries, including sport-utility vehicles and minivans, gained 0.3 percent to 1.34 million last month, the China Association of Automobile Manufacturers said Dec. 9.

China’s vehicle sales have slowed this year from 2010’s record 32 percent expansion as inflation, higher interest rates and the end of a two-year stimulus plan deter purchases. Chinese deliveries may expand at a slower pace than U.S. light vehicle sales for the first time since at least 1998, according to the Chinese trade group.

Mercedes is discounting locally produced vehicles in China by 6 percent to 10 percent, while BMW is offering some “small discounts” on inventory that is more than six months old, Jose Asumendi, a Royal Bank of Scotland Group Plc analyst, said in a note to investors today, citing dealer visits in the country.

Volkswagen AG is discounting imported vehicles by 5 percent, and offering limited or no discounts for locally produced cars, Asumendi said.