BMW, Mercedes Boxed in by Tariff Battles

US President Donald Trump’s escalating trade spat threatens to disrupt German carmakers’ business on three continents.

Mercedes-Benz and BMW stand to lose most from tit-for-tat import tariffs imposed first by the US on China and then reciprocated, since each builds its popular SUV models in the US for export to the world.

Since July 6, they have to pay a 40% duty on the value of each exported unit, prompting BMW to consider price hikes for its China-bound products.

Unfortunately for both, there is not much they can do to shield themselves from the fallout.

Citing lower than expected sales in China, Mercedes parent Daimler AG in June was already forced to lower this year’s profit target and expects earnings at Mercedes to deteriorate, despite record first-half volumes.

 Few Short-Term Fixes

Investment bank Evercore ISI, which has called the China tariff “a tax on Southern Germany,” argues that there are few short-term fixes.

“The most the OEMs can do is start to work through what the options are, and probably the easiest would be examining the extent to which you reallocate distribution,” said analyst George Galliers. “Economically it may make sense to keep as much of that production for the US domestic market, keep supply short in other markets and look if you can take a bit of pricing [action] as a result of demand exceeding supply.”

China’s levy on the Alabama-built Mercedes GLE and other models comes at a time when demand worldwide may be peaking for the brand. June global sales figures show that its 63-month streak of volume gains has ended, as China could no longer offset contractions in the US and Europe.

The two German companies are being targeted although they continue to invest heavily in their US plants to boost their exports. Roughly a fifth of all German-brand cars built in the US last year were destined for customers in China, according to industry association VDA.

Mercedes employs 24,000 workers at its assembly plant in Vance, Ala., roughly 8% of its overall work force, and announced in October it would spend $1 billion there to begin production of battery-powered SUVs.

In an attempt to reduce the general risks from unused fixed capacity, Mercedes is transforming its production network from churning out either front- or rear-wheel-drive vehicles to both in the future. These “full-flex” plants could theoretically build almost any kind of Mercedes model, from compact crossovers to electric sedans, on the same line.

But it is a slow transition that has only just begun, with a key groundbreaking last month in Hungary. And suppliers often have to make significant investments to keep up. One manufacturer of door trims and bumpers, Samvardhana Motherson Peguform of India, just built a production site in Tuscaloosa, Ala., to deliver parts for next-generation SUVs.

Daimler would say little, other than that it is “monitoring the situation closely” and “prepared to take corresponding measures.”