China's fast-growing exports of autos and auto parts face one significant obstacle: tariffs. S&P Global Ratings believes increased duties will only have moderate direct effects on rated Chinese car firms. The secondary effects are more unpredictable and may be more impactful for entities.

China is the world's biggest auto exporter, with many strengths. Costs are low, companies can make use of robust domestic supply chains, and the country has fostered a highly competitive electric-vehicle (EV) sector. Chinese carmakers also have an open lane to the Russian market, after many international firms pulled out of that country. An industry association projects China's auto exports will grow 10% this year. This export strength has made entities more sensitive to tariffs.

Moreover, Chinese auto-parts makers are integrated into global supply chains. They will be exposed if a market is abruptly hit with fresh U.S. duties. The fluid tariff situation also makes planning difficult, particularly with regard to offshore investment.

We address the questions posed by investors on the possible direct and indirect effects on China's auto sector. We assume Chinese carmakers can absorb an extra 10% tariff on U.S. exports (implemented), and a 25% tariff on Mexican exports to the U.S. (pending but under discussion) with limited credit impact.

However, we appreciate that the tariff situation for this sector may deteriorate swiftly and severely, and that may have implications for ratings.

Frequently Asked Questions

How will recent U.S. tariff actions on China and Mexico, implemented or proposed, affect Chinese carmakers? What are the secondary effects?

We expect the direct impact to be manageable, given Chinese auto makers' small exposure to the U.S and Mexico.

China's auto exports to the U.S accounted for about 2% of the country's total auto exports or just 0.4% of the auto sales in 2024. Mexico absorbed 6.9% of China's auto exports last year, and 1.4% of Chinese auto sales.

Table 1

That said, given the oversupply and intense pricing pressures that Chinese vehicle firms are experiencing in their home market, the loss of any sales offshore may reduce capacity utilization rates and dampen profitability.

The indirect effects may be more meaningful. For example, if the U.S. followed through on a proposal to raise tariffs on all Chinese imports to as high as 60%, the Chinese economy would be hit hard.

We assume China's 2025 GDP growth rate would fall below 2% in the scenario (see "How Would China Fare Under 60% U.S. Tariffs?" published Nov. 17, 2024, on RatingsDirect). Consumers in China would likely buy significantly fewer vehicles in which case, and that would hurt rated Chinese carmakers and suppliers.

The unpredictability of U.S. tariff actions also weakens Chinese firms' ability to plan investments. For example, the U.S.' potential 25% tariff on Mexican exports could deter Chinese carmakers from building plants in Mexico.

The U.S.-Mexico-Canada Agreement is a trade deal that facilitates the free movement of many goods among the three countries. It allows automakers with plants in Mexico to tap the U.S market with zero tariffs if local content requirements are met.

The potential 25% tariff looming on Mexican exports to the U.S. may force Chinese carmakers to reconsider plans to build plants in Mexico. BYD Auto Co. Ltd. for example is considering building a Mexico facility, according to media reports.

Chinese carmakers for now have little production capacity in Mexico. The tariff issue is much more about their ability to expand overseas, and not about returns on existing assets.

How might the U.S.' fresh 10% duty on China and the potential 25% tariff on Mexico affect China's auto suppliers?

We see greater sensitivity to tariffs among China's car-parts makers. The U.S. is China's largest export market for auto components, accounting for about 15%-20% (by value) of such exports in recent years. However, we estimate that exports to the U.S. account for less than 5% of Chinese auto suppliers' revenue.

That said, if carmakers ask suppliers to share the tariff burden or auto demand weakens in the U.S because of the price hike, it could lead to a modest loss of sales volumes and margin compression, particularly for auto suppliers with large exposure to the U.S market.

China's auto-parts exports to Mexico are smaller, about 6%-8% of the total. A few suppliers have also set up manufacturing plants in Mexico, via acquisitions or greenfield investment, to better serve international carmakers in North America.

There were 33 Chinese auto suppliers registered in Mexico in 2023, according to industry data. Eighteen of these firms shipped about US$1.1 billion of auto parts to the U.S during the year. The potential 25% tariff on Mexico would likely hit the sales and margins of these components producers.

Among rated auto suppliers, Yanfeng International Automotive Technology Co. Ltd. (BBB-/Stable/--) has a manufacturing base in Mexico that exports to the U.S. We estimate this exposure to be a single-digit percent of its total revenue. The company's improving product mix and stringent cost control will likely mitigate pricing pressures and the impact of increased tariffs.

Johnson Electric Holdings Ltd. (BBB/Stable/--) derives about one-quarter of its revenue from sales to the U.S., most of which is through products exported from China or through plants in Europe and Mexico. Increased tariffs on China and Mexico will likely weigh on the company's margin and cash flows, if its customers do not fully bear this cost. We believe the company's record of disciplined cost management and a potential reshuffling of its production will mitigate tariff effects.

The incremental tariff impact on Chinese battery suppliers, including Contemporary Amperex Technology Co. Ltd. (A-/Stable/--), will likely be limited. In general, Chinese battery suppliers have small production capacity in Mexico since the upstream battery supply chain remains highly concentrated in China.

The U.S. is the top export destination for Chinese electric battery makers, accounting for about one-quarter of the total value of Chinese battery exports in 2024. Most of the exports are for energy storage, in our understanding, including storing and distributing electricity at a grid level.

The total cost of energy storage systems from China is 40%-50% lower than those made in the U.S., in our view. This should give room to Chinese battery makers to partly pass on the tariff cost to customers and remain competitive in the U.S. This is despite the additional 10% import duty imposed by the U.S. on China from in 2025, and an additional 25% tariff in 2026 on Chinese battery exports.

How would potential tariffs on Europe from the U.S. hit China carmakers and suppliers?

We expect the impact to be limited for most Chinese car firms, at least for the next one to two years, given their limited presence in Europe.

A few automakers plan to localize production in Europe to manage import tariffs on Chinese battery electric vehicles. We also expect Chinese carmakers to produce in Europe mainly for Europe, instead of using Europe as a hub for exports to the US. Potential tariffs on Europe from the U.S could heat up competition in the European auto market, as entities strive to recoup lost sales from exports (if any). That may pose challenges for the Chinese firms based there.

Among our rated Chinese carmakers, Zhejiang Geely has the largest exposure to auto exports from Europe to the U.S via its subsidiary, Volvo Car AB (BB+/Stable/--). Volvo exported 16% of its vehicles to the U.S. in 2024. A potential 20% tariff would likely cut Zhejiang Geely's EBITDA margin by about one percentage point in 2025-2026.

Nevertheless, we believe Zhejiang Geely has some flexibility to handle the tariff. Remedial actions such as raising selling prices and increasing production in the U.S. would help it to moderate the impact of increased U.S. duties, for example.

For Chinese auto suppliers, the impact from the potential tariff on Europe will likely be second order. The largest auto exporters from Europe to the U.S. (by units) are carmakers including Toyota Motor Corp., Hyundai Motor Co., Kia Corp., Stellantis N.V., and Volkswagen AG. Chinese auto suppliers that have higher exposure to these carmakers could feel more indirect impact. Vehicle makers may ask suppliers to cut prices to protect their own margin.

To what extent does China's auto sector rely on exports?

A lot. Exports offer significant growth opportunities for Chinese carmakers, particularly as the domestic market remains oversupplied.

Exports are increasingly important to China's sales of commercial vehicles, with domestic turnover falling from the 2020 peak on the back of weaker demand and a large fleet size. Exports accounted for almost one-quarter of China's commercial-vehicle sales in 2024, up from 5% in 2020.

Chart 1

In the passenger vehicle segment, China's exports are vital to alleviating the volume, pricing, and margin pressures in the home market. Sales of internal combustion engine (ICE) vehicles are falling in China. Exports will help offset this shrinkage, with units exported accounting for nearly one-quarter of Chinese firms' sales of ICE passenger-vehicles in 2024.

China's burgeoning EV sector explains much of the falloff in domestic sales of ICE vehicles. However, China's growth in EV exports decelerated meaningfully in 2024, albeit off a high base. Increasing trade barriers and stalling electrification in large, developed markets will further constrain this growth. Exports accounted for only 10% of China's electric-car sales last year.

Chart 2

What is the outlook for China's vehicle exports this year? Which markets will be important?

China's auto exports grew to 6.4 million units in 2024, from 5.2 million units in 2023, according to official data. Russia, the EU, Asia, the Middle East and Central and South America were the main export destinations, with each accounting for about 15%-20% of China's vehicle exports (by units) in 2024.

Chart 3

To fend off competition and to protect the local auto industry, some governments have imposed or raised import tariffs on China-made vehicles in the past one to two years (see table 2).

Table 2

We expect growth in Chinese auto exports will slow in 2025, given high-base effects and potentially weaker demand overseas. Autos shipped to Russia, China's single largest export market, could falter after Russia raised fees to scrap old vehicles.

Continued high interest rates and tightened lending policies may constrain auto demand in certain Asian markets. This would likely limit China's auto-export growth to a single-digit percent this year.

Which Chinese auto firms are most focused on exports? How will added U.S. tariffs affect rated carmakers?

Among the top Chinese auto exporters, Chery Automobile Co. Ltd., Anhui Jianghuai Automobile Group Corp Ltd., and Great Wall Motor Co. Ltd. are most reliant on exports, with 35%-65% of their sales volume coming from offshore.

We rate Zhejiang Geely Holding Group Co. Ltd. (BBB-/Stable/--), Beijing Automotive Group Co. Ltd. (BBB/Stable/--) and China FAW Group Co. Ltd. (A/Stable/--). The impact of incremental tariffs (on both Mexico and China) would be manageable for these entities. Exports comprise less than one-fifth of their sales volumes, mostly sales of ICE vehicles to Russia, Europe and the Middle East. The firms also have minimal production in Mexico.

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Editor's note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential and actual policy shifts and reassess our guidance accordingly (see our research here: spglobal.com/ratings).

Editor: Jasper Moiseiwitsch

Related Research

• Industry Credit Outlook 2025: Autos, Jan. 14, 2025
• Auto Industry Buckles Up For Trump's Proposed Tariffs On Car Imports, Nov. 29, 2024
• How Would China Fare Under 60% U.S. Tariffs?, Nov. 17, 2024
• Rated China Carmakers Can Take The Heat From European Tariff Hikes On EVs, June 17, 2024