As the European automotive market shrank and competition increased in China, Volkswagen assured investors that the group at least still had ample room for growth in the US market.
But Donald Trump’s volley of tariffs — including a 25 per cent levy on car imports — has swiftly damped the hopes of Europe’s largest carmaker and the multitude of suppliers that rely on Germany’s automotive industry.
Analysts at S&P Global now expect 1.2mn fewer cars to be sold in the US next year, compared with their forecast a month before — not exactly an invitation for a company looking to expand market share. VW is, of course, far from the only company affected.
“The only good thing about the tariffs is, at least, that everyone is impacted by them,” observes one VW executive.
Auto executives around the world were shocked on April 2 — Trump’s so-called liberation day — when he followed through on his threat to impose tariffs not only on rivals such as China, but also on close allies such as Germany and the UK.
The White House may have granted partial reprieves to some countries, including the UK and China, but since April 3 a 25 per cent tariff has still applied to most foreign-made vehicle imports, with only limited exemptions.
Analysts at Bernstein had estimated that German automakers could face combined tariff-related costs of between $2bn and $4bn under Trump’s original plans if they remain in place for the full year.
Last month, Mercedes-Benz, Porsche and Stellantis withdrew their full-year guidance as they warned it was impossible to predict the indirect consequences of the trade war, from the availability of parts sourced from China to the reaction of US customers to expected price hikes.
Tariffs on imported parts from May 3 — including engines, electronics and interiors sourced from Mexico and China — have rattled just-in-time supply chains. Industry groups warn the measures could upend cross-border production flows that have defined carmaking under the United States-Mexico-Canada Agreement (USMCA).
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Mercedes-Benz chief financial officer Harald Wilhelm told investors in late April that if tariffs remained in place for the full year on imports from Europe and Mexico to the US — and from the US to China — the Stuttgart-based company’s return on sales for cars could fall by three percentage points.
Ola Källenius, chief executive, has warned that the current market environment is the most complex he has encountered in more than three decades in the automotive industry.
“We cannot say for sure exactly how the three quarters that are coming towards us will play out,” he said when Mercedes-Benz reported that first-quarter earnings before interest and taxes had slumped 41 per cent to €2.3bn.
The situation facing global carmakers — longtime beneficiaries of a globalised world — has become so dire that many have given up hope that diplomacy alone will resolve it, and are now taking matters into their own hands. On April 18, senior executives from VW, BMW and Mercedes-Benz met Trump at the White House in a closed-door session aimed at easing trade tensions. They made the case that all three companies already make a significant number of vehicles in the US and are, in fact, important car exporters from the country.
The carmakers have also tried to leverage their local workforces. BMW employs more than 11,000 people at its Spartanburg plant in South Carolina, which is the company’s largest facility worldwide. Mercedes-Benz’s factory in Tuscaloosa, Alabama, supports about 4,000 jobs directly and indirectly, while VW’s Chattanooga, Tennessee, plant has a workforce of more than 4,000.
BMW was the largest US automotive exporter by value last year, shipping 225,000 vehicles, worth more than $10bn, from Spartanburg. Milan Nedeljković, BMW’s board member for production, says the factory is now “the largest BMW plant globally”, adding that the company has helped build up “the strong supplier network in the region”.
VW, which builds vehicles in Chattanooga for the US market, manufactured domestically roughly a third of the cars it sold in the country last year, with the remainder imported from Mexico and Europe.
Audi, part of the VW group, is particularly exposed, as it does not produce any vehicles in the US and relies on imports from both Europe and Mexico — both now targeted by tariffs. The company has said it is prepared to work with US policymakers to expand its production footprint in the country, as a way to lessen the impact of the new tariffs, as has Mercedes-Benz.
BMW, however, has taken a more cautious approach. Chief executive Oliver Zipse said in March that the company was “in no rush” to expand investments in the US. “We started to invest in the United States 30 years ago [and] have now invested overall $14bn,” he said.
But the tariff threat to US car sales — and by extension, production — is far from the only challenge for manufacturers. The escalating trade war comes at a time when carmakers are already grappling with deeper structural challenges, from the costly shift to electric vehicles to a weak economic outlook in Europe.
In May, the Munich-based Ifo Institute, a think-tank, warned that US tariffs were putting additional pressure on a German economy that is already in recession.
A decision by the incoming Berlin government to loosen the country’s strict fiscal rules and increase spending on infrastructure and defence has helped to slightly lift sentiment in parts of German industry.
But the tariffs, says Ifo automotive industry expert Anita Wölfl, have “nipped the first positive business developments in the bud, especially in the European market”. She adds that German companies’ export expectations fell sharply in April, after two consecutive months of strong gains.
For many in the automotive industry, the timing could hardly be worse: just as the first signs of optimism were returning to Europe’s industrial heartland, the trade war has ushered in a chill.
