The Impact of Tariffs on the Global Auto Industry
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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. On today's episode, we'll take a look at market action with Shams Abzal, Managing Director at the Carnegie Investment Council. That conversation in a bit. First, the impact of tariffs on the global auto industry. Today, in the States, Ford Motors said it's preparing to raise prices on cars, rolling off assembly lines beginning next month if...

President Trump does not deliver on tariff relief that he's hinted at for the automakers. And at the same time in China, a report today by the Economic Information Daily saying Chinese car part producers will suffer from U.S. tariffs on imports of cars and key parts. Joining me now for a closer look from Shanghai is Dr. Stephen Dyer. He is head of the Asia Automotive Practice at Alex Partners.

Dr. Dyer, good of you to make time to chat with us. Big picture, if we can. We'll start right there out of the gate, because I'd like to begin by getting your thoughts on how tariff policy from the United States is essentially reshaping the global automotive industry.

Yeah, thanks. It's a pleasure to be here. The tariff policies that have been changing rapidly this year have had a tremendous and deep impact on the automotive industry. From

the US Mexico Canada agreement impact as well as sourcing and manufacturing in low cost countries. This goes and is pervasive throughout the automotive value chain. It's been 20 or 25 years in the making. So,

It's causing companies now to reevaluate their long-term and short-term options. So if you had to re-engineer any part of the supply chain, whether it be for auto parts or vehicles themselves, how long would that take? It's not a simple task to even change a supplier of a component for an automobile. It can take anywhere from six months to 18 months to find a new supplier, negotiate prices, validate the production line requirements,

of the new part. A lot of these parts are safety related, and so that's one of the drivers for the longer time to validate the part. So this is just for a single component. Of course, if you want to set up new automotive assembly somewhere else, whether it be in the US or elsewhere, it can also take 12 to 24 months.

So right now you're speaking to me from Shanghai. The Chinese automakers really do not have access to the market in the United States, but Europe is a very big market, especially for Chinese manufactured EVs. Give me a sense of how what is happening on the trade side could definitely rearrange the landscape when it comes to China accessing the European market.

Well, you're right. First of all, the U.S., the China EV makers currently have, or even prior to the Trump administration, have 100% tariff on exports to the U.S. However, regular internal combustion engine, gasoline engine vehicles did not have such a tariff. And so many of the U.S. automakers were producing in China and exporting to the U.S. So that now has increased.

the door has closed pretty much on that as well. Speaking of Europe, recently in the last six months, Europe instituted new tariffs on certain EV makers in China. Some of them, it will have an inordinate negative impact on. Others still have such a cost advantage that it won't impact their plans. But what we have seen is

Chinese automakers accelerating some of their plans to localize assembly in Europe. And this is one avenue that they can take to keep that market open to them. Is there anything to be said for the fact that China seems to be way out in front when it comes to integrating the interior of the automobile, which is to say that they have successfully integrated the smartphone and the automobile? Does that necessarily translate into much of a competitive advantage right now?

The development of what we call intelligent technology for the vehicle, which includes automatic driving, intelligent driving, as well as intelligent cockpit voice recognition and connectivity to the rest of your personal internet ecosystem, is really an advantage of Chinese automakers right now. And it's one of the key selling points within China, this intelligent technology, and Chinese consumers have come to expect that.

That could and will be a potential competitive advantage in other markets, such as Europe and Southeast Asia, Latin America, and so on, as well as the U.S. Our recent survey said that many young people in the U.S. are interested in Chinese vehicles if the time comes when they have access to them. So, yes, this will be.

be a competitive advantage for Chinese automakers and they're moving very quickly due to the buildup of the artificial intelligent machine learning ecosystem in China.

There's been a lot of criticism about the overcapacity in the Chinese manufacturing economy, particularly when it comes to electric vehicles. And that criticism, coming especially from the Europeans, has been that overcapacity has led to a dumping of EVs. So is overcapacity an issue? And if it is, are we likely to see much more in the way of consolidation among the EV makers on the Chinese mainland?

China is finishing about 20 years of extremely high growth in the auto industry. And so many auto companies with government support have added capacity rapidly in a forward-looking way. And so today, indeed, the average capacity utilization for auto assembly in China is around 50%.

to be profitable in China, you need 60 or 70%. So indeed, some companies are looking overseas as an outlet for their production capacity in China. However, the companies that have the lowest production capacity in China now, or sorry, the lowest capacity utilization in China right now are actually the foreign brands that have joint ventures in China because their market in China has,

dried up substantially over the last several years and so they're sometimes faced with less than 20% capacity utilization. So

That's why many of the Detroit automakers have been exporting from China to the U.S., which was a win-win back in the day. But the companies that are leading in exports in China right now are ironically not the ones with the lowest capacity utilization. They're the local winners who are now looking to expand their global markets.

One of the criticisms of those joint venture projects had to do with the fact that maybe Chinese firms were taking intellectual property from either North American producers or European producers. To what extent have vehicle manufacturers in China kind of moved beyond that? And they are able now to innovate on their own rather than relying on technology from either the Americans or the Europeans.

Right. The requirement for foreign automakers to form joint ventures to produce in China

has been a 30 plus year experiment. And initially it didn't seem like it was working too well in terms of transferring knowledge and especially related to new product development. However, in the last five years with electric vehicles and intelligent vehicles, you're absolutely right. The capacity and capability of Chinese manufacturers to develop vehicles with this intelligent technology has now

one might say, exceeded those in the West and outside of China in terms of its value for money value proposition.

So we see a lot of advanced intelligent technology in China that's very inexpensive for the consumer. And this is going to be a compelling value proposition outside. So the tables have turned a little bit. We now see several automakers from outside of China looking to take advantage of the China product development and technology ecosystem to develop products for the rest of the world. So examples of that are Volkswagen and Xpeng automakers.

with Volkswagen investing in Xpeng. Stellantis has invested in Leap Motor and intends to use Leap Motor as part of their brand portfolio as a low-cost EV. We've also seen Renault set up China Advanced Development Center to take advantage of the China technology ecosystem and

the supply base to develop low-cost EVs. A lot's been made of autonomous driving. I'm curious to get your take on where China is in that process, in the evolution of autonomous driving.

Companies in China have taken a stepwise approach to autonomous driving. Whereas many years ago when I was in the auto industry in the corporate world, we expected full level four autonomous driving to happen by maybe 2022. It turned out to be much more difficult than that. And so instead of a leap toward full autonomy,

The progress has been step by step, level one, level two, level two plus, level two plus plus. And so that's what we see in China, just a gradual improvement in autonomy and the capability for what we call navigation on autopilot, which means you put in a destination and the

autopilot will help you get to that destination. So it's very incremental. And that seems to be working well, not only in China, but in the rest of the world as well. I'm interested in one dynamic in particular, BYD on one hand, Tesla on the other. Give me your sense of that rivalry.

Well, these are the two highest volume dedicated new energy vehicle or electrified vehicle companies. So it's interesting to watch that face off. And I think competition is good for everyone, good for these companies to learn and progress, good for consumers. And it's actually exciting.

In terms of the outlook, I'm wondering whether you're optimistic right now, maybe more cautiously optimistic. Maybe it's a case of your enthusiasm being slightly tempered as to what lies ahead for the automobile industry. Well, certainly the rapid progression of intelligent driving and intelligent cockpit technology is something that I think...

gives us a lot of reason to be enthusiastic and optimistic, both as a consumer. I love driving these vehicles and trying out their new features. But also as the auto industry evolves into more of a high tech industry. Sometimes in the West, we use the term software defined vehicle, which really represents just

an increased value of intelligent technology. In China, they don't use that term because it's just sort of inherently integrated into the vehicle now. And that's exciting and cause for optimism about the direction that

the automotive industry will take. We also see advancements in battery and battery charging technology and claims that now you can charge a battery to give you about 250 miles of range in five minutes.

Now, it's still early to validate those claims and there's a lot of work yet to do, but this would resolve the main reason that many people don't want to buy an electric vehicle. And so that is exciting as well and room for optimism. Okay. On the other side, what is your greatest concern when you look at the industry right now? Well, right now...

With the advent of China technology and low-cost manufacturing, this represents a direct disruptive impact on the automotive industry. And so it's important for auto players from more traditional companies to learn how to do what is required in this new technology-rich environment for the auto industry. And so players that are interested

less effective at changing the way they do things to, to use the new technology, uh, may be under considerable challenge. The other sort of elephant in the room, if you will, is, is the current tariff and trade protection environment. We've now gone through 20 or 25 years of globalization, uh,

companies have optimized their supply chains for this more open global trade scenario. And so now we see tariffs happening and reciprocal tariffs.

and measures and countermeasures. So the question is, is this a negotiating tactic temporarily or is this a long-term protectionist measure or something in between? So this will definitely disrupt the global supply chain for the automotive industry and cause companies to rethink how they set up. We'll leave it there, Stephen. Thank you so much. Dr. Stephen Dyer, head of the Asia Automotive Practice at Alex Partners, joining us here on the Daybreak Asia podcast.

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. Today's Fed speak was hawkish. Chair Jay Powell once again said the Fed must ensure tariffs do not trigger a more persistent rise in inflation. Trade now is the focus. And the effects of that are likely to move us away from our goals. So unemployment is likely to go up as the economy slows in all likelihood, and inflation is likely to go up as tariffs find their way. And some part of those tariffs come to the...

come to be paid by the public. That is Fed Chair Jay Powell speaking at the Economic Club of Chicago. He went on to emphasize the need to keep longer-term inflation expectations well anchored. We also heard today from the head of the Cleveland Fed, Beth Hammock, and she suggested the Fed should hold rates steady until there is more clarity on the impact of tariffs.

So their remarks combined seem to dampen hope for a near-term cut in interest rates. Longer term, though, the swaps market is holding to the bet for at least three rate cuts this year. For a closer look at the price action, I'm joined now by Shams Afzal, Managing Director at the Carnegie Investment Council. He's on the line from Toledo, Ohio.

Shams, thank you so much for making time to chat with us. When I hear what Powell had to say today, I'm thinking that stagflation really is what we're going to be confronted with in the near term. Is that what you're assuming? Yes, certainly. You know, when we think about the 90-day delay on the reciprocal tariffs on, you know, maybe a trillion dollars worth of trade, that's not including the major partners like China, Mexico, Canada and Europe.

If you do include those numbers back 90 days from now, then the answer has to be that we're looking at a sub 1% GDP. And obviously, some analysts are there predicting that we may actually dip below zero. So I mean, that's basically a dictionary definition of stagflation. Now, when we think about the market reaction, even including the last two weeks,

It doesn't appear that a good portion of market participants actually believe that the broad swath of tariffs that have been announced will actually remain in place for the duration of the year. Otherwise, the market sell-off has to be much more intensive.

than what we have seen so far. Well, it's interesting that you make that point because we learned today that the Trump administration is preparing to pressure certain nations to curb trade with China as the White House negotiates with trading partners on this issue of tariffs. We know that at least a dozen nations are seeking either reductions or exemptions.

And in exchange for doing so, we are told that the U.S. is set to ask them to take steps to limit China's manufacturing might. So this very much seems to be dynamic and aimed at trying to strike a negotiation. But the pressure point seems to be directly focused on China. Is that the way that you understand it? Well, if you ask me tomorrow, I might change my mind on this because, you know, China

Ordinarily, you would find that if the goal was to coalesce an alliance ultimately to go after China, then you probably would not have prioritized European tariffs as much as they have so far, because I think that would be one of the major counterweights against China.

So, you know, the way we think about this, out of the $3.2, $3.3 trillion worth of trade that the U.S. does, about a trillion of that comes from, you know, roughly 50 or 60 countries that were part of this reciprocal tariff announcement on Liberation Day. But you take that $1 trillion what's left behind, essentially the rest of the $2 trillion is across basically four or five trading partners.

So if you're not getting those four or five partners on board, but you're getting the Laos and the Cambodians and the Vietnams of the world on board, I am not sure exactly how much counterweight you're building up, right? So I want to see more data.

I'm not quite there yet. If that is the ultimate goal, then certainly the order in which the tariffs have been announced should have been done a little bit differently. But then again, we are not privy to all the details. And if today's discussion with the Japanese counterparts

know bear any fruit then i will start to feel a little bit better about maybe having a grand plan behind this but since april 2nd you know i've been more confused about just the general direction of of much of this uh than i would have been in december or january of this year shams i want to get your assessment of the risk of a much more dramatic decoupling between the us and china we had a bipartisan house committee today accusing deep seek of

posing a profound threat to U.S. national security. Now, we know yesterday that the monthly activity data in China was above expectations, but those data do not really reflect the impact of these new tariffs. And I'm wondering whether or not

China, on one side, is particularly vulnerable here. But from the U.S. side, whether or not the Trump administration senses that vulnerability and is going to lean more aggressively into restricting China and in the process, maybe allowing this relationship to further decouple. Is that possible?

Yes, it certainly is possible. But again, the deep seek angle is one thing. I think we're dealing with much broader impacts within the relationship. I think when it comes to deep seek specifically, we think that there's a lot that has been coded into the system that feels very derivative. In other words, the model was designed to output

in a way that seems to have been built on the output of models like a chat GPT. So I'm not taking any innovation away from what they've been able to achieve in terms of the compute intensity, et cetera. But I think the way the model is designed, there's a derivative aspect to it. Now, the question becomes if

If we are, American citizens are using this in a manner not quite understanding where the queries are going and how much detail or information we are willing to share without understanding where, you know, what servers these are going to, where the compute is happening, then that certainly becomes a bigger problem than you might even say that TikTok poses today, right? So I think there is certainly a national security impact

that comes to bear at that point. But when we think about other industries, the rare earth minerals is really where my mind goes to. We have been given a bit of a reprieve in that almost 40% of Chinese trade, which really deals with electronics and Apple products, et cetera, that has been given a bit of a relief, right? But to the extent that China is serious about curbing

rare earth availability for the U.S. in general, I think it's going to end up becoming a bigger problem down the road. I think this is going to head, and we hope that ultimately by the end of next week, we are not looking at a 250% tariff, but rather

delegations sort of meeting and deciding that, yes, these are the targeted tariffs that we likely will never have agreement on, namely steel, aluminum, et cetera. But there are a whole bunch of other areas that we should have agreement on because I think it's not in the U.S.'s interest to bring back textiles.

right? We should not be the best manufacturer of handkerchief and underwear or neckties. We should focus on other things if we believe in the concept of comparative advantage. So ultimately, I would like to see a much more targeted way of dealing with China. But again, things are moving so dramatically that every forecast

that we do make we know that we are going to be miles ahead of what the reality ends up being so we can describe this the relationship right now between the us and china as a trade war some people don't like to use that terminology i get that bloomberg opinion columnist james stravitas a former navy admiral was saying today that he is increasingly concerned about the possibility

of a hot war between the US and China. Does that enter your thinking at all, that things could get much, much worse and we could be involved in some type of military conflict?

I don't believe so. Again, I would not question people in the military who have access to maybe more geopositioning of military assets, et cetera. So I will not question it. But I would say that between number one and number two economies in the world, I think there is plenty of

delegation beyond the two of the main characters in this scene, where we believe cooler heads will prevail because ultimately it is not going to be in China's best interest to really ramp this up. One thing is to save face for your own local population and not be seen as

giving away too much slack to the Trump administration. But ultimately, I think there are serious people who understand that it's not something that you would take lightly. And whatever grand plans that they may have, cooking up whether it's related to Taiwan or some of the other countries

great sea area dominance that they have, none of that will come to fruition if they get bogged down on the economic front, right? So my personal take would be that we don't see a military conflict here, but we do see a significant ramping up of dialogue and maybe trading barbs.

and things getting slightly worse before they start to look better. Shams, we'll leave it there. Thank you so much for taking the time to talk with us. Shams Abzal there, Managing Director at the Carnegie Investment Council, joining from Toledo, Ohio, here on the Daybreak Asia podcast.

Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the stories shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Krisner, and this is Bloomberg.

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