Europe's OEMs spooked by coming 'car war' with U.S.

Germany's OEMs stand to lose a lot if Donald Trump imposes further tariffs on China and the EU. Spooked by the prospect of a 'car war' with the U.S., they're making a last-ditch peace offering. But a recent profit warning indicates that Daimler, for one, now thinks a trade war is the most likely outcome.

U.S. President Donald Trump is threatening to impose tariffs to the tune of $200 billion on Chinese goods. In a related move, he's also threatening a duty of 25% on imported vehicles and vehicle parts – which would also affect car manufacturers in the EU. If this goes ahead, it is certain that China and the EU will retaliate. That would be the beginning of a potentially very long and costly trade war.   

$11 billion
In anticipation, Beijing already said it would impose a 25% tariff on the 270,000 U.S.-manufactured vehicles that China imports each year. This would hit German manufacturers with plants in the U.S. especially hard: they represent $7 (€6) billion of the total value of $11 (€9.5) billion of American cars exported to China. 

Largely because of the looming trade war, Daimler has downgraded its profit forecast for 2018. Although the impact of the new, stricter WLTP emissions tests on sales were also at issue, the major factor is the prospect of protectionist measures by the U.S. The company now forecasts its Earnings Before Interest and Taxes to be slightly lower than in 2017. Previously, EBIT was forecast to be slightly higher. 

Daimler expects China's retaliatory tariffs on U.S.-manufactured vehicles to lead to “fewer-than-expected SUV sales and higher-than-expected costs”. The company manufactures Mercedes C-class and SUVs in Alabama, many of which are exported to China. 

The German company is the first car manufacturer to lower its projected profits because of the looming conflict. Market analysts Morgan Stanley say more are now likely to follow. 

Largest exporter
BMW could be next. Its largest plant in the world is located in Spartanburg, South Carolina (pictured). The Bavarian manufacturer is the largest vehicle exporter from the U.S., with about 18% of all BMWs sold in China made in the U.S. In 2017, the Spartanburg plant shipped more than 100,000 SUVs to China. 

According to analysts Evercore ICI, Mercedes stands to take a $765 (€659) million hit from a trade war between the U.S. and China, and BMW could face an impact of up to $965 (€831) million. 

It's not just the Germans that are affected. So is Volvo, the Swedish brand that is now owned by China's Geely Company. And ultimately, warned Volvo CEO CEO Håkan Samuelsson, the biggest victim of Trump's move to protect the U.S. car industry could be... the U.S. car industry.

4,000 jobs
Opening a new, $1.1-billion (€950-million) Volvo plant outside Charleston, South Carolina, Samuelsson said that a trade war could undermine plans to create up to 4,000 jobs at Volvo's new plant in South Carolina. The Charleston plant will build the S60 model, mostly for the U.S. market but some for export. The Volvo S60s currently sold in North America are all imported from Volvo plants in Europe and China.  

The Swedish automaker employs around 900 workers at its South Carolina plant, with plans to increase the total to 1,500 as production ramps up later in the year. By the time the factory reaches full capacity, it may require around 4,000 workers.  

However, if the U.S. does impose tariffs on imported cars and America's trading partners retaliate with similar tariffs on U.S.-manufactured cars, that could put a brake on Volvo's hiring plans, Samuelsson says. 

Olive branch
On the European front of the trade conflict, German automakers now support abandoning the 10% tax and 2.5% duty on U.S. car imports into the EU. They also want to abandon plans for a 25% tax on U.S.-manufactured pickup trucks, crossovers, SUVs and big vans...  if Trump does the same with his plans for a 25% tariff on European car imports. 

It is doubtful whether such an olive branch would work. With Trump's recent imposition of tariffs on imported steel (25%) and aluminium (10%) from the EU, Canada and Mexico – and the EU's own retaliatory tariffs on a range of American products, from bourbon to blue jeans, the first shots in the trade war seem to have been fired already. 

Investors seem to share in Daimler's gloom about the certainty of a trade conflict – 'car wars' included: share prices in Daimler, BMW and VW have fallen sharply in recent days.

Image: AnthonyA7, CC BY-SA 3.0