Carmakers face fresh China import threat

Tom Mitchell in Tianjin

©Bloomberg

Multinational carmakers already under pressure from Chinese regulators and dealers face a new challenge in the world’s largest auto market — increased competition from unauthorised “parallel imports” of their own vehicles from the US.

New rules from Shanghai’s fledgling free trade zone, issued last week, formally legalise the sale of cars that manufacturers originally intended to sell in the US and other markets — allowing buyers in the city to bag discounts of about 20 per cent.This follows quiet moves by Beijing last August to allow parallel imports in other cities such as Tianjin, as part of a larger effort to lower the high cost of many goods and services in China.

Last year, Chinese competition regulators forced many foreign carmakers to lower the cost of their vehicles, spare parts and services during an investigation into allegedly anti-competitive behaviour. More recently, Chinese car dealers have demanded greater financial support from their suppliers.

Now the emergence of parallel import markets is putting even greater price pressure on multinational carmakers, especially premium European brands.

Large price differentials for auto brands sold through manufacturers’ official dealer networks in the US and China create an arbitrage opportunity across the Pacific. Middlemen are buying cars in the US and shipping them to unauthorised dealers in China in increasing numbers.

At China’s largest market for parallel imports, in the port city of Tianjin, an Audi Q7 sport utility vehicle imported from the US was on sale last week for Rmb660,000 ($106,000) — 20 per cent cheaper than the Rmb828,000 charged by the German manufacturer’s authorised China dealerships. In the US, Audi’s suggested retail prices for the Q7 start at just $48,300, or Rmb299,000.

Carmakers are fighting back against this latest threat to their largest and most profitable market, prohibiting their US dealers from selling cars to people who they suspect intend to export the vehicles to China. But once arbitrageurs have obtained a car in the US, it is legal for them to ship it abroad.

“The [carmakers] have lost the battle on the Chinese side,” said Max Warburton, an analyst at Bernstein Research. “On the US side they are throwing everything they can think of at it.”

The most popular cars in this emerging trade are premium European brands including Audi, BMW, Mercedes and Land Rover. Toyota Prado SUVs, large Ford pick-up trucks, Maseratis and Porsches are also on display at the Tianjin market. The Toyota Prados and Maseratis had been sourced from markets in the Middle East.

Carmakers argue that parallel imports diverted from the US to China may not fully conform with local vehicle requirements — a process known as homologation.

“We don’t expect substantial impact to our business in China [from parallel imports],” BMW China said. “Customers should always be transparently informed and notified about deviating specifications and potential risks associated with parallel imported cars by the responsible importer.”

Parallel import dealers, meanwhile, are eyeing other Sino-US arbitrage opportunities. “The Chinese government should also allow imports of used cars from the US,” said Xu Shengli, a salesman at the Tianjin market. “That would be even more beneficial for Chinese consumers.”