China's New Car Tax Could Make Luxury Cars an Endangered Species

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Includes: F, GM, HMC, TM
by: Stephanie Grimmett

Only in China would a car salesman refuse to sell you a big fancy foreign car.

China is increasing the tax on large luxury cars, bringing the charge up 13%-33%, depending on engine capacity.

The new tax will come into effect on September 1, and car dealers have halted sales on the vehicles in reaction to the news.

So here's the scenario: You walk into the dealership and ask how much for the shiny red Mercedes SUV in the window. The salesman gets up from his desk and says, "Oh, I'm sorry sir, we can't sell you that car right now. But how about this nice BMW sedan... Well, yes, you're right. It isn't really a foreign car. It was made by BMW Brilliance Automotive right here in China... Oh, you want a foreign car? How about this nice little South Korean number over here?"

The dealers are trying to prevent customers from "cheating" the vehicle tax in the next two weeks before it comes into effect. What? Wait a minute, they won't sell me a car because it's going to be more expensive next month? The logic of the situation elludes me. But there you have it.

Here in the States, car dealerships would use the next two weeks as a fabulous excuse for an ad campaign. "Buy now! Before you have to pay more!"

The new car tax was designed to encourage consumers to buy smaller cars that use less gas and, subsequently, save oil. Perhaps if the Chinese government wants the population to use less oil, it should stop subsidizing gasoline prices. A 33% hike on the taxes of a one-time charge, like a new car, could encourage people to think twice about buying a gas-guzzler, but, as U.S. citizens can tell them, paying $70-$100 everytime they fill up their gas tanks makes a much bigger dent in the national psyche.

Either way, it's a really bad time to be a luxury carmaker. You're losing customers in your domestic markets because of high oil prices. And your sales in emerging market countries, where you've had most of your growth in the last few years, are falling because of high car prices. Maybe Mercedes will introduce its first subcompact, or Audi will come out with a spunky rip-off of the MINI Cooper. In the meantime, Laura Cadden's latest Editor's Pic is looking better and better.

Stock position: None.