US Autos in China: Tax Cut Should Stimulate Demand, Stabilize Pricing

The China State Council announced an auto stimulus package earlier yesterday. The key provision is a reduction in the vehicle purchase tax to 5% from 10% on vehicles with 1.6 liter engine and below. This segment represents about 70% of the approx. 19MM unit China passenger vehicle market, and we estimate ~$1,500 savings to the consumer. The tax cut is in effect from October 1, 2015 through 2016 year-end. The announcement also gives local governments the authority to run scrappage schemes to accelerate the transition of China's vehicle population to smaller, more efficient engines.

History would say this could be a meaningful stimulus: The impact on volume is difficult to gauge. In 2009 / 2010, a similar tax cut led to acceleration of volume growth to ~40% per year in 2009 / 2010, from 8% in 2008. Clearly we don't expect that type of acceleration (the market is much bigger now and the economic picture is very different), but there is precedent that a $1,500 price cut can meaningfully stimulate demand.

 Tax discount covers high % of mainstream foreign brand volume: While the benefit is likely skewed towards the Chinese local brands, we'd highlight that most of the mass-market foreign automakers also have significant volume in the 1.6l and below category. Of passenger vehicle sales, we estimate that 1.6l and below represents: 71% of unit volume for Ford; 84% for GM; 88% for Volkswagen; 33% for BMW; and, 43% for Daimler.

It is believe that price stabilization was already likely given recent dealer inventory reductions and improved consumer demand. But this stimulus should add additional support which may lessen concerns on non-luxury automaker margins (and subsequently lessen concerns on incremental supplier pricing pressure). Additionally, this should give the automakers some additional time to tweak future capacity growth plans, if the global economy deteriorates.

"We think this should reduce near-term uncertainty around China and provide a boost to current valuations; nevertheless, we expect sentiment to remain very cautious on the Autos given global economic cycle concerns and uncertainty around European diesel demand and emission compliance costs",says Credit Suisse.