Chain Reactions

Long queues have once again formed at gas stations. Following the oil price hike at 24:00 on March 9th, domestic refined oil prices are set for their sixth adjustment this year. Based on the current pricing mechanism, starting from 24:00 on March 23rd, domestic gasoline and diesel prices (standard products) are projected to increase by RMB 2,205 and RMB 2,120 per ton, respectively, with the actual regulated increases amounting to RMB 1,160 and RMB 1,115. Given the current price of RMB 7.60 per liter for 92-octane gasoline in Beijing and Shanghai, it is estimated that after the oil price adjustment on March 23rd, domestic oil prices will rise by approximately RMB 0.87 per liter, not reaching the previously anticipated "nine-yuan era." However, the scenario of long lines at gas stations with everyone filling up their tanks on the eve of oil price hikes is repeating itself. The military strikes launched by the United States and Israel against Iran have not only heightened tensions in the Middle East's geopolitical landscape but also disrupted the global energy pattern, triggering a series of chain reactions.

After Iran announced the blockade of the Strait of Hormuz, giant merchant ships carrying energy resources such as crude oil and natural gas have collectively suspended their voyages. This waterway, which is merely slightly over 30 kilometers wide at its narrowest point, accounts for approximately one-third of the global seaborne crude oil export trade and serves as a crucial "chokepoint" for global energy transportation.

On March 21st, Iran further tightened passage rules through the Strait of Hormuz and deployed maritime forces to strengthen control. On the same day, the United States carried out precision strikes on Iranian coastal missile sites and accelerated the formation of an international escort alliance. International oil prices, impacted by these developments, surged once again, having already accumulated an approximately 50% increase since the conflict erupted on February 28th.

Beyond oil prices, automobile exports may also be affected. According to statistics from the China Passenger Car Association, by 2025, China's automobile exports to the Middle East are expected to account for around 20% of the total annual overseas exports, with an export volume reaching 1.39 million vehicles. The Middle East market has become a significant growth area for Chinese automobiles in their global expansion. Chinese brands such as Chery, Changan, and Geely have all made important strategic deployments in the region and have already secured a certain market share, entering the top tier of the market.

With the superimposition of unstable factors, automakers have to take responsive measures. Feng Qingfeng, CEO of Lotus Group, recently stated that due to geopolitical factors, Lotus Cars has temporarily suspended exports to the Middle East. Brands such as Toyota Motor and Hyundai Motor have taken production reduction measures, with Toyota estimating a reduction of nearly 40,000 vehicles.

The conflict seems to have inevitably spread to the automobile industry.

Limited Impact on the Domestic Auto Market?

Affected by the situation in the Middle East, international oil prices have surged, once approaching USD 120 per barrel, but then plummeted to below USD 90 per barrel on March 10th.

On March 11th (local time), the International Energy Agency held an emergency meeting, and 32 member countries formally agreed to release 400 million barrels of oil reserves into the market, marking the largest-ever joint reserve release action in history. Rumors of an "oil shortage" and "preparing for oil prices of USD 200 per barrel" have sparked heated discussions online.

Many consumers believe that the automobile industry is highly tied to oil, and fluctuations in oil prices will gradually be transmitted to the refined oil sector. Not only will private car owners notice changes in refueling costs, but operational costs for taxis, ride-hailing services, and freight transportation are also likely to change, which may, to some extent, affect travel and transportation prices.

However, Cui Dongshu, Secretary-General of the China Passenger Car Association, stated in a dialogue with Tencent's "Auto Market Hot Topics+": "Domestic oil prices in China are calculated based on a weighted average of prices such as Brent crude. The procurement costs of oil in many places are actually very low, so pricing is essentially determined by the international market, and domestic consumers merely bear the final costs. Whether oil prices rise or not is actually a separate matter from the actual cost of oil usage in China." He believes that the impact on domestic consumers is not that significant.

More pressure is being transmitted to the corporate level. For example, rising crude oil prices will drive up the prices of upstream automotive raw materials such as rubber and plastics, continuously increasing vehicle manufacturing costs. At the same time, maritime fuel costs are also rising, further compressing corporate profit margins.

However, new opportunities are also emerging. For instance, rising oil prices may increase the cost of using fuel-powered vehicles, potentially driving changes in consumer preferences for vehicle purchases. Both in the domestic and overseas markets, more consumers may be willing to consider hybrid or pure electric vehicle models.

Therefore, unlike Chinese automakers, which are generally vigorously developing new energy vehicles, European, American, Japanese, and Korean automakers, which still rely heavily on fuel-powered vehicles, may be the first to feel the market pressure brought about by rising oil prices.

Opportunities Outweigh Challenges

Currently, Chinese automobiles' overseas layout in the Middle East is gradually shifting from mere vehicle exports to localization, including local assembly, production, and research and development. These infrastructure constructions are basically concentrated in Turkey and have not yet been affected by the spread of the situation. However, airspace, especially the maritime sector, has been significantly impacted, and the effects are not limited to Iran alone.

As one of the most important export markets for Chinese automobiles, the Middle East market had an export volume of approximately 1.3 million vehicles last year, second only to the Central and South American market and surpassing the EU market, making it the second-largest market for Chinese automobile exports. It is reported that last year's exports to the Middle East mainly consisted of zero-kilometer used cars. After national policy tightening, these vehicles were all released in December last year, and most had arrived at ports by January-February this year.

Moreover, the impact is mainly concentrated in the United Arab Emirates (UAE) and Saudi Arabia. The UAE is not the country most affected by the Strait of Hormuz, as it has two coasts. Therefore, it has already adjusted its export strategy to export vehicles from another port, and this adjustment has now been fully implemented, with some vehicles already able to dock at the new port.

Automobile industry experts point out that Saudi Arabian shipping routes can indeed detour to the Red Sea and transport vehicles through Jeddah Port in western Saudi Arabia. This route originally accounted for two-thirds of Saudi Arabia's automobile import capacity. In this way, local land transportation costs will rise, but from the perspective of vehicle transportation, this can, to a certain extent, offset the impact of the blockade of the Strait of Hormuz. Many vehicles in the Chinese market were once imported from the UAE, so the flexibility of transshipment trade in the Middle East is very strong. Even if a certain market cannot facilitate transshipment, it can still shift to other regions.

Currently, Chery Automobile, which has been deeply rooted in Iran for 20 years, may be the most affected. As early as 2004, Chery became the first Chinese automobile brand to localize production in Iran through CKD (Completely Knocked Down) assembly methods and currently has two joint-venture CKD factories there with an annual production capacity of approximately 300,000 vehicles. At the same time, this year was supposed to be an important strategic year for BYD to expand into the Middle East, but its strategic rhythm will also be affected to some extent.

More severely, the uncertain factors in the Middle East market have led several multinational automakers to label it as a "risk area," affecting consumer sentiment.

Currently, automakers are taking various measures, including timely loss mitigation, strategic contraction, and strategic relocation. In the eyes of industry insiders, despite the volatility of international oil prices, sharp increases in logistics and insurance costs, and setbacks in brand operations in the Middle East, the overall impact on China's automobile industry is quite limited. On the contrary, this conflict has exposed the fragility of the global supply chain and may accelerate the energy structure transition. For Chinese automobile brands, which have been vigorously developing new energy vehicles for more than a decade, the opportunities outweigh the challenges.

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