China’s New Spin on a Turbo Tax; Its Consumers Must Contend With Steep Taxes on Everything From iPhones to SUVs, but Some Car Makers Are Turning This to Their Advantage

September 13, 2013 Leave a comment

September 12, 2013, 12:21 p.m. ET

China’s New Spin on a Turbo Tax

Its Consumers Must Contend With Steep Taxes on Everything From iPhones to SUVs, but Some Car Makers Are Turning This to Their Advantage

ABHEEK BHATTACHARYA

Like iPhones, cars are pricier in China because of higher taxes. Chinese consumers are complaining that the new iPhone 5C costs at least $184 more than in the U.S. Most of that difference is due to taxes. Cars face a bevy of levies, too, such as customs duties, value-added taxes and purchase taxes. A big one is a consumption tax of up to 40% based on the size of the car engine, to encourage fuel efficiency. This tax is a big reason car makers are adopting “turbo” engines. Turbocharging technology helps deliver the same power with a smaller engine, by pumping more air into it. Such vehicles accounted for 13% of all cars sold in China last year, double the proportion of the year before, and that may rise to 35% by 2020, says LMC Automotive.One such car maker is BMW‘s BMW.XE -0.56% local partner, Brilliance China Automotive. A turbo engine with the popular 5 Series model reduced BMW-Brilliance’s consumption tax to 5% this year from 9% before, says Macquarie’s Janet Lewis. Since the company pays this tax at the factory gate, this could add up to 1.8 percentage points to its gross profit margin, she estimates. Another example is SUV maker Great Wall Motor, GWLLY -2.38% which pulled down its tax burden by two percentage points by fitting its most popular model with a turbo engine.

So far, both BMW-Brilliance and Great Wall Motor haven’t passed on the benefits of lower taxes to consumers. BMW can perhaps afford not to, since it sells more on brand than price. However, if more mass-market car makers adopt this technology, competition may force them to pass the savings down.

Another beneficiary of the turbo trend: companies supplying these engines. This includes Honeywell, HON +0.12% which says it provides turbochargers to at least 30 car makers in China, including General Motors’ local venture with a Shanghai firm. Michigan-based BorgWarner BWA -1.62% may also benefit—it works with Great Wall Motor, for instance.

One potential loser from the turbocharge trend: Beijing’s fuel-efficiency drive. Small turbo engines don’t always lower fuel consumption, Consumer Reports, an American monthly magazine, found earlier this year after numerous tests. One problem is the turbocharger may pump more fuel alongside more air, according to the magazine. If Chinese car makers can’t get the engineering right, Beijing’s moves would have an effect, just not the one originally intended.

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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