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19th of November 2018


Trade woes aplenty for German luxury brands

PARIS — President Donald Trump's new North American trade pact may have brought greater planning certainty for global auto executives, but another front risks opening up as the U.K. prepares to leave the European Union early next year.

Both have the potential to redraw the map when it comes to the complex web of vehicle and component production. Carmakers such as Daimler are contemplating everything from sourcing more engines locally for its U.S. operations to moving production of its GLE crossover from Alabama to China to fulfill minimum local content rules or circumvent punitive tariffs.

"We know we need to localize more," BMW Group CEO Harald Krüger told reporters this month at the auto show here, adding that his teams would be working for the next two to three months to review the specifics of Trump's deal with Mexico and Canada.

Trade disputes such as the tit-for-tat import duties imposed by the U.S. and China on billions of dollars in goods have already hurt Germany's highly profitable premium carmakers Mercedes-Benz and BMW. Because of their comparatively small scale, the high returns they traditionally earn are crucial for financing a voraciously growing r&d budget.

But both have been forced to revise their earnings forecasts lower this year, citing among other headwinds burgeoning protectionist measures that distort the market.

As the third quarter wrapped up, BMW said last month its core autos division may achieve a profit margin of only 7 percent, snapping a string of eight years during which this key indicator fell within the segment's target corridor of 8-10 percent.

Daimler CEO Dieter Zetsche said it was too early to say what Trump's U.S.-Mexico-Canada Agreement would precisely mean, but conceded that his Mercedes passenger car operations in North America would not fulfill the future requirements of the new trade deal.

"We are currently examining what changes are necessary to bring it into compliance," he said.

This could mean adding more engine production to the Nissan plant in Decherd, Tenn., where Mercedes sources four-cylinder gasoline engines.

Balance is best

Krüger said he welcomed the USMCA in principle, but had seen only drafts and needed to study the fine print of the new deal before taking any decisions.

But he said the best solution was a balanced global production network and supplier chain aligned as much as possible with its sales footprint.

"For this very reason we made the decision 2½ years ago to add production of the X3 [in South Africa] long before the risk of a possible trade war between the USA and Europe was on the radar screen," he said. Pretoria has a deal with Brussels to freely trade in the EU's single market, the world's second-largest economy after China, according to the latest estimates by the Central Intelligence Agency.

Zetsche's Mercedes unit is also struggling under the weight of 40 percent retaliatory tariffs imposed by China on models such as the GLE imported from its plant in Vance, Ala.

Although Beijing intended to punish Trump's domestic economy for instigating the dispute, the German carmakers are suffering the most. Zetsche estimated Mercedes and BMW combined account for roughly 80 percent of the vehicles shipped from the U.S. to China.

"With the current measures decided already, essentially all of our imports from the USA to China are affected," Zetsche said.

He suggested his company would decide soon whether to set up assembly of complete knockdown vehicles or even move to full-scale production of the GLE to China to insulate itself from buffeting trade winds.

"We're nearly at a point where we will be able to make a decision for possible measures I mentioned." The greatest unknown, Zetsche said, is how long the U.S.-China conflict will last.

Brexit worries

A main issue on everyone's mind in Paris was the difficult discussions between the EU and the U.K. over the U.K.'s exit on March 29. So far little progress has been made in the two-year negotiation period, as attempts by the U.K. to cherry-pick the best parts of EU membership while remaining outside the community have failed.

If "maximum progress" is not reached during a two-day summit that begins Wednesday, Oct. 17, senior EU policymakers warned, then the two sides may be unable to formalize a deal by next year's deadline.

This cliff-edge Brexit could result in an automatic duty of 10 percent imposed on cars crossing the English Channel. It would also ratchet up the production costs of a vehicle because tens of thousands of parts cross EU-U.K. borders multiple times before final assembly.

If this worst case becomes reality, it would make it impossible to count the engines BMW builds at its Hams Hall factory in England as European content under free-trade deals with countries such as Japan. Without it, the competitiveness of its Mini brand, for example, would be at acute risk.

"Then I am compelled to build this car in the Netherlands, and I told [British Prime Minister] Theresa May that personally," Krüger said, estimating the odds of a deal being roughly even. "One way or the other, there will be consequences."

Clogging the border

It is not just tariffs raising the cost on imports and exports that worry industry executives.

More than 1,100 trucks cross into the U.K. from the continent every day, according to industry estimates. Freight forwarders have been warning that the main traffic artery from the port of Dover in England could be clogged as parts deliveries await customs clearance. Carmakers are unsure how robust their supply chains will be if these nontariff barriers are put in place.

"The problem is there's so many logistics chains existing from Europe to the U.K. and the other way around, and this is the real issue — the reliability of the parts supply and the customs procedures." Krüger said. "Today if there's a truck in France standing still for two or three days [on the European side of the channel] because there's issues with the papers, it could stop the production easy."

Renault-Nissan Chairman Carlos Ghosn, whose company operates the largest car plant in the U.K. that exports the bulk of its production to mainland Europe, disputed speculation of a cliff-edge Brexit, precisely because everyone knows this would be a disaster. Posturing and brinkmanship are normal the closer parties come to a negotiating deadline in order to extract maximum concessions.

"I hope I'm not wrong but I just don't buy the doom scenario personally," he said. "There is always common sense. Obviously, you dramatize a little bit because otherwise how do you get the concessions you need?" 

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