German automakers brace for headwinds as trade wars flare

BMW's Spartanburg, S.C., assembly plant is a major exporter.

The headwinds facing German carmakers just got stiffer with Friday's start of a much steeper import tariff on U.S. car exports to China. The tit-for-tat trade move will hurt BMW AG and Daimler AG the most.

It's yet another step away from the comfortable old world revolving around production, price and market share. For decades, BMW, Daimler and Volkswagen AG came out on top in a global league churning out desirable cars for the masses and luxury buyers. That order is fading fast.

Germany's carmakers are fighting on an unprecedented number of fronts: While trade tensions intensify, record spending is required for electric cars to keep up with emissions regulation, even if buyers remain on the fence.

In Europe, VW's diesel crisis lingers, and tougher tests on tailpipe exhaust and fuel consumption are holding back sales. Competitors from China and the tech industry encroach.

"Having secondary battlefields right now is making life very difficult" and depressing margins, said Peter Fuss, a partner at consultancy EY. "There's a lot of pressure to have the most innovative ideas and not run the risk of being overtaken."

Here's a rundown of what's raising the stakes for German producers right now:

Trade tremors

Carmakers have dealt with tariffs for decades, building factories locally where rates are high, like in China. But the U.S.-China trade rumbles, and Trump's June threat to hit cars from the European Union with a 20 percent levy, mark a sudden U-turn in a decades-long trend to lower barriers. Manufacturers have no way of quickly adjusting their value chain, prompting Daimler to issue a profit warning. Brexit is holding back car purchases in Europe's second-biggest car market, and is a major worry for BMW's U.K. Mini and Rolls-Royce plants.

  • U.S. tariffs would add 10,000 euros ($11,688) to the sticker price of European-built cars if a 25 percent tariff is imposed, the EU estimates.
  • The Porsche and Audi brands are most exposed to levies on EU cars, as neither VW unit produces in the U.S.
  • As of Friday, China is charging a 40 percent levy on U.S. light-vehicle imports. BMW is estimated to ship more than 70,000 SUVs to China from its U.S. plant this year.
  • For German carmakers, potential global tariff increases put a combined 6 billion euros of earnings before interest and tax at risk, according to Bloomberg Intelligence.
  • A no-deal Brexit resulting in a 10 percent WTO import tariff would have a bigger impact than the U.S. threat. Last year, German carmakers exported 900,000 vehicles to the U.K., compared with 640,000 EU-assembled cars shipped to the U.S., says Bloomberg Intelligence.
  • On the flipside, China lowered duties to 15 percent from 25 percent for imports other than from the U.S. from July 1, a boon for Mercedes and BMW who import about one-third of vehicles sold in their most important single market. Porsche, with no Chinese production, also wins.

"We have, again and again, proven that we can emerge stronger out of adverse conditions," BMW CEO Harald Krueger said in response to questions from Bloomberg. "The automotive industry in Germany is capable of constantly renewing itself."

Electric spending

Much of the record increase in research and development budgets is directed at electric cars to keep up with emissions regulation -- even if demand remains uncertain for now. Volkswagen has vowed to spend 20 billion euros ($23 billion) by 2030 on a lineup including the standalone I.D. brand. It's earmarked another 50 billion euros to buy the batteries. Daimler is investing 10 billion euros to release 10 new vehicles by 2022, and BMW plans 12 battery-only cars by 2025.

  • Global carmakers plan more than 200 electric cars by 2022; vehicles will struggle to make a return as demand remains low, according to consultancy Alix Partners.
  • For now, Jaguar's I-Pace crossover is the only model by a traditional carmaker competing with a Tesla S or X. Audi's e-tron crossover will follow later this year.

"What counts during these times of volatility and rapid change is not losing sight of key trends," BMW's Krueger said. "We have the financial strength to invest into driving the mobility of tomorrow."

Diesel damage

Industry fallout from Volkswagen's 2015 violations of diesel emissions rules continues to hit hard. Diesel, central to automakers' strategy to meet tough EU rules on reducing fleet carbon dioxide emissions, is out of favor with buyers worried about urban driving bans. More potentially costly action on emissions practices remains on the horizon, as Daimler and VW continue to face regulator scrutiny and lawsuits in Germany, the U.S. and elsewhere.

  • EU fleet emissions of greenhouse gas CO2 from new cars in 2017 rose for the first time in at least seven years and will rise again in 2018.
  • Fiat Chrysler is facing 1.07 billion euros in potential fines and Daimler may be liable for a fine up to 540 million euros for failing EU CO2 limits, analysts say.
  • Audi's suspended CEO Rupert Stadler remains in custody over his role in the third-biggest luxury carmaker's diesel scandal.

Tougher tests

The EU is switching to a new certification procedure to give consumers and regulators data on emissions and fuel consumption that better reflects how cars drive in real-world conditions. While carmakers have long known about the changes, Volkswagen and Daimler are struggling with the switch. From September, all vehicles sold in the EU as well as Switzerland, Turkey, Norway and Ireland must meet the new standard.

  • VW plans production halts during the third quarter after running out of time to check more then 200 model variants; the disruption will result in 600 million euro earnings impact during 2018, according to Evercore ISI.
  • Daimler cites the so-called Worldwide Harmonized Light-Duty Vehicles Test Procedure as a factor in its June profit warning.

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