Tariffs, US Sanctions May Deal a Double Blow to Chinese Carmakers With Military Ties

A Changan UNI-V model car is displayed at the Beijing Auto Show on April 26, 2024. (Wang Zhao/AFP via Getty Images)

News Analysis

The United States recently hiked tariffs steeply on an array of Chinese imports. The higher tariffs may be doubly painful for some of China’s biggest automakers—those with ties to the Chinese military. It’s a sector that is already being buffeted by geopolitical tensions over Chinese support for Russia.

The increasingly friendly relationship between Russia and China has been an economic boom for Chinese car makers, who are struggling elsewhere as the West pushes back over Chinese trade practices. Chinese car exports to Russia have surged sevenfold since the start of the Ukraine offensive in February 2022.

However, the Russian market is proving to be a liability for China’s automakers, particularly those with ties to the Chinese military, as U.S. lawmakers target the blurry line between state and private enterprise in China.

The profits of two of China’s “Big Four” automakers have taken a hit in recent months from price competition at home and resistance to Chinese trade strategies from the West. Pressure on Changan Automobile and Dongfeng Motor Corporation, automakers with ties to China’s military-industrial complex, has increased as U.S. lawmakers called for stepped-up sanctions targeting China’s support for Russia.

On May 14, the Biden administration quadrupled tariffs on Chinese electric vehicles (EVs), adding yet another layer of pressure on the car makers.

Changan Automobile

Changan Automobile is China’s oldest auto manufacturer. It’s also China’s oldest military-industrial enterprise, tracing its history back to 1862, when it got its start as the Shanghai Foreign Gun Bureau.

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Today, as an affiliate of China Weaponry Equipment Group, Changan is at the core of China’s defense industry, under the direct management of the central government. The group is under semi-military management, and in times of war, turns into a military unit.

On April 29, Changan published a disappointing first quarter financial report, showing that its income had increased 7.14 percent year-on-year, but its net profit was only 1.16 billion yuan ($160 million) a whopping decline of almost 84 percent year on year.

Although Changan’s net profits fell, its sales had actually increased significantly: the carmaker sold 692,100 vehicles in the first quarter of 2024, 13.9 percent more year on year. Among these, electric vehicle sales totaled 128,800, a 52.4 percent increase over the same period last year.

The auto giant’s stock plummeted on the bad news. On April 30, Changan’s closing price fell to 14.72 yuan ($2.4), and its market value evaporated by 16.2 billion yuan ($2.25 billion). Guotai Junan, a major securities firm in China dumped a whopping 1.84 billion yuan ($255 million) of Changan shares.

A week later, on May 7, the company’s closing price slid to just 14.46 yuan ($2).

Changan Automobile blamed price competition for the sharp drop in net profit. It pinned hopes on improving profits in the later stages by reducing costs and launching electric products.

Dongfeng Motor

Dongfeng Motor Corporation is another large state-owned automaker with a military background. Dongfeng began making trucks for the Chinese military in the late 1960s. Today, it is one of China’s “Big Four” state-owned automakers, along with SAIC Motor, FAW Group, and Changan Automobile.

It sells passenger vehicles, EVs, and luxury off-road vehicles. It also makes military armored vehicles and civilian variants of those vehicles. Dongfeng has a history of exporting military vehicles to war-torn areas, including Myanmar and Sudan.

Dongfeng released its 2023 financial report in late March, showing that although the company had year-on-year growth in revenue and gross profit, its net profit declined.

It was the first time the company had posted a loss since it went public in late 2005.

Competition in Chinese EV Market Intensifies

The price race in the Chinese electric vehicle market has intensified significantly. In the five years from 2018 to 2023, more than 400 electric vehicle companies have been forced out of the market due to intense competition, according to a report from Chinese financial media stcn.com.

BYD Auto, China’s electric vehicle premier, announced in March that it will sell models in the 100,000 yuan ($13,800) range at a discount of about 20 percent, and will offer a substantial discount on all models. Other brands cut prices by 10,000 to 30,000 yuan ($1,380 to $4,150). Changan Automobile slashed the price of its plug-in hybrid SUV by nearly 30 percent.

Zhu Huarong, chairman of Changan Automobile, said at a Jan. 16 auto industry conference that the Chinese auto industry “is grappling with disorderly competition … entering an era of uncertainty and turmoil.” Mr. Zhu said he expects significant changes for the EV industry over the next two years, and possibly sooner.

Mr. Zhu noted that with costs remaining high, the EV industry is losing money. For example, of the more than 70 passenger car brands on the market in China, only four or five are actually profitable.

Sanctions Target Supposedly Civilian Enterprises

As Western companies pulled out of the Russian car markets, Chinese car companies reaped the profits. From January to October 2023, Changan Automobile sold 33,374 vehicles in Russia, ranking fifth among the top 10 automobile sellers in the country. Changan Automobile currently sells 14 models on the Russian market, the most of any Chinese brand.

However, the United States is increasingly sanctioning Chinese support for Russia’s military operations, and those sanctions specifically target companies like Changan.

On April 17, U.S. Rep. Mike Gallagher, chairman of the House Select Committee on Chinese Communist Party Issues, and three members of the House of Representatives introduced the NO LIMITS Act, referencing Russia and China’s “No Limits Partnership.”

According to the NO LIMITS Act, China “increases the size of the country’s military-industrial complex by compelling civilian Chinese companies to support its military and intelligence acitivities. Those companies, though remaining ostensibly private and civilian, directly support the PRC’s military, intelligence, and security apparatuses and aid in their development and modernization.”

It cites the “inherent blurred lines” between civilian companies and the Chinese military as a compelling reason for the new sanctions.

Thus it specifically calls for sanctions on foreign companies that are “known Chinese military companies(ies)” or “covered exporter(s) of automobiles to the Russian Federation.”

The act would give listed companies a 180-day grace period to exit the Russian market or face full U.S. sanctions. It contains a list of more than 50 Chinese companies, including Changan International, another name for Changan Automobile, and 4 other automobile companies.

Meanwhile, on May 1, the United States issued fresh sanctions targeting Russia over the Ukraine war. The Treasury Department imposed sanctions on almost 200 companies, while the State Department designated more than 80 companies. A Treasury Department press release said the United States “is particularly concerned about entities based in the People’s Republic of China (PRC) and other third countries that provide critical inputs to Russia’s military-industrial base.”

West Wary of Chinese EV Dumping

Sanctions aside China’s EV industry is already battling increasing resistance from Europe and the United States over China’s trade practices.

In October 2023, the European Union announced it would conduct an anti-subsidy probe into EVs imported from China to determine whether to impose anti-dumping tariffs. The probe would determine whether Chinese EVs “benefit from illegal subsidization and whether this subsidisation causes or threatens to cause economic injury” to EU makers of EVs, a press release said.

Slectric cars for export stacked at the international container terminal of Taicang Port in Suzhou, in China's eastern Jiangsu Province, on April 16, 2024. (STR/AFP via Getty Images)

An April 29 report by the Rhodium Group, a U.S. think tank, noted that the European Commission is likely to impose tariffs of 15 to 30 percent in response to the probe. However, the report—titled “Ain’t No Duty High Enough”—cautioned that even with the stiff duties, Chinese EVs would still be profitable, predicting that a tariff of 40 to 50 percent would be needed “to make the EU market unattractive” for Chinese EV exporters.

U.S. lawmakers were also calling for higher tariffs on Chinese auto imports.

U.S. Secretary of State Antony Blinken, visiting China in late April, said in a press conference that the Chinese Communist Party’s (CCP’s) unfair trade and industrial overcapacity have potential consequences for the world.

He stressed some essential industrial products like solar panels, electric vehicles, and batteries, raising his concern that “China alone is producing more than 100 percent of global demand for these products, flooding markets, undermining competition, putting at risk livelihoods and businesses around the world.”

“Now, this is a movie that we’ve seen before, and we know how it ends—with American businesses shuttered and American jobs lost,” he added.

On May 14, the Biden administration, taking aim at China’s “unfair, non-market practices,” announced it will raise tariffs on a wide range of Chinese products, including EVs. The new measures will quadruple tariffs on Chinese EVs, from 25 percent to 100 percent.

Military Enterprises Caught in Political Turmoil

Automakers caught up in China’s military-industrial complex are facing another layer of pressure, from within China.

Since last year, CCP leader Xi Jinping has been conducting a wide-scale purge of top brass—notably across the military and the defense industry, but broadening to include other business leaders as well.

The campaign has snared many military officers and executives of military-industrial complexes. Dozens of top executives at state-owned companies have been replaced over the past year, and the trend continues.

While the purge clearly aims to remove elements that might challenge Xi’s authority, enterprises such as Dongfeng that have drawn attention for falling profits have also been caught up.

According to an April 17 report from China’s state media The Paper, the leadership of Dongfeng Motor Corporation has been under scrutiny in “an anti-corruption storm.” Over 20 officials and executives have been removed in the past six months, in a company wide sweep. The Paper went into detail about Dongfeng’s record-making loss.