BMI View : The new Shanghai FTZ, in our opinion, has the potential to boost component exports from China, which grew 4.6% y-o-y in H113, due to preferential trade tariffs within the zone. While Chinese vehicle exports remain mired in a downtrend due to the country's rising cost of production, the provision of investor friendly incentives and world-class port infrastructure within the FTZ could attract more vehicle export oriented investment in the country.
SAIC Motor Corp recently launched a subsidiary based in China's first free trade zone (FTZ) located in Shanghai. The subsidiary will be a trading company and use its 100,000 square metre warehouse to source auto parts worth CNY20bn (US$3.3bn) annually within five years. The Shanghai FTZ offers lower duties and faster custom clearance for trade activities.
We see this development as a positive for the automaker. SAIC is China's largest carmaker and has been looking to diversify its sales out of the country for some time. Furthermore, the firm has been setting up production bases in overseas markets such as Thailand ( see 'Thai Base Will Be SAIC's Asian Springboard', July 5), and plans to establish sales ventures in the Middle East and Latin America in the near future. This new trading company will be able to leverage the FTZ's preferential trade tariffs and source the most competitive component prices for the carmaker's global operations.
FTZ Has Potential To Boost Exports
We believe the Shanghai FTZ could go on to boost China's auto parts exports. While exact details on the economic incentives within the zone still remain sketchy and it is likely that the FTZ's full potential will take years to materialise, its set up is a step in the right direction. According to the China Automobile Manufacturers Association, the gross value of auto parts exports rose 4.6% year-on-year (y-o-y) in H113. If regulators manage to attract more suppliers to set up shop within the FTZ and take advantage of its preferential tariffs, component exports can be further boosted.
On the other hand, the current picture for Chinese vehicle exports is not as bright. BMI has long held the view that export oriented auto manufacturing is becoming increasingly uncompetitive in China due to the rising cost of production. Adding weight to our view is the sharp y-o-y declines in vehicle exports over the past few months. While some of the contraction can be attributed to cooling demand in some of the regional markets, Thailand and Indonesia, two prominent regional exporters, have not experienced such drastic falls in the same period. Therefore, we conclude that other factors such as China's rising manufacturing wages are to be blamed for lacklustre export volumes.
|Can The Shanghai FTZ Arrest This Decline?|
|China - Vehicle Exports Value In US$Mns And Units (LHS); % Chg y-o-y (RHS)|
Lastly, while it is still too early to tell, we speculate that it is possible that automakers may be attracted to export vehicles from the FTZ in the future. For example, General Motors Company (GM) plans to boost its Chinese vehicle exports by 70.0% in 2013, to 130,000 units, on the back of demand from emerging markets for low-cost Chinese cars. If the Chinese authorities put together investor friendly incentives - for example, just requiring a representative office in the FTZ to enjoy its benefits as opposed to an actual manufacturing plant - and follow up with the provision of world-class port infrastructure within the zone, more carmakers could follow in GM's footsteps and look to export from China.