Auto manufacturers grapple with challenges posed by China's weak yuan and Donald Trump's tariffs
Feeling the Heat: German Automakers' Ongoing Struggles Amid Trade Tensions
The road looks bumpy for German car manufacturers, as they grapple with financial setbacks in Q1. Both Volkswagen and Mercedes-Benz have seen their profits nose-dive, following a challenging 2018. Adding salt to the wound, President Trump's tariffs are escalating the situation, striking at an unfavorable moment.
Although it's tricky to gauge the exact repercussions of U.S. trade policies on demand, both automakers have admitted to possible repercussions. Mercedes-Benz has warned that if the U.S. government remains resolute despite negotiations, they could take a severe hit. In fact, their passenger car business could lose almost half of its previously projected operating profit due to the tariffs. Moreover, they've suspended their previous guidance and anticipate earnings to dip in their van division as well.
Prior to the tariffs, effective since early April, Mercedes was grappling with a tougher market. Their Q1 net profit dipped by a staggering 43% year-on-year to €1.73 billion, while revenue slid by over 7% to €33.2 billion, due to a decrease in global sales. Things aren't looking up in China, either, with the lavish set famously buying fewer foreign premium and luxury cars amid economic uncertainty.
To Raise or Not to Raise
In a bid to combat the financial impact of U.S. tariffs, Mercedes is contemplating potential countermeasures, including possible price hikes. The company's CEO, Ola Källenius, intends to expand their U.S. footprint in the coming years, according to recent reports. However, details about negotiations with U.S. officials remain under wraps.
It might be that Mercedes increases its domestic production due to pressure from the U.S. government. The automaker already produces large SUVs, such as the GLE and GLS, as well as their electric variants, at their plant in Tuscaloosa, Alabama. Mr. Trump has signaled his desire to boost U.S. industrial production.
Analysts: An Economic Tidal Wave
Volkswagen, on the other hand, has tread more cautiously. Their CFO, Arno Antlitz, stated during the company's Q1 results presentation that the impact of U.S. tariffs cannot be accurately assessed. While the company remains steadfast in their annual guidance, they highlighted that the influence of tariffs isn't yet incorporated. Analysts predict VW to face billions in additional costs if Trump's 25% tariffs stand.
VW is exploring options to produce more cars in the U.S., even for their Audi subsidiary, which currently lacks local production. Further details, however, cannot be disclosed at present. It's speculated that VW could commence Audi model production at their U.S. plant in Chattanooga.
For now, VW's Mexican-built cars still benefit from tariff-free treatment under the USMCA agreement between the U.S., Canada, and Mexico. Nevertheless, Antlitz conceded that this exclusion does not apply to Audi's Mexican models, which fail to meet the minimum local value-added requirements and would consequently be subject to tariffs.
In Q1, the corporation's profit dropped by a significant 41% to 2.19 billion euros. A diminishing business in China, like Mercedes, contributed to the slump. Simultaneously, the company's revenue inched up by nearly 3% to €77.6 billion, and sales increased by 1% to around 2.1 million vehicles. Despite this slight improvement, Antlitz expressed dissatisfaction with the results.
The tariffs that went into effect in April also started to leave their mark: VW had to write off 150 million euros for vehicles already in transit at the time of implementation, as Antlitz explained. Out of the roughly 730,000 vehicles that VW sells annually in the U.S., just over 200,000 are manufactured domestically. Approximately 300,000 originate from Mexico, where VW and Audi operate plants, with the rest from Europe.
The Industry Braces for Impact
VW's fierce competitor, Stellantis, falls under similar pressure due to the U.S. tariffs. The group, forged from Peugeot and Fiat Chrysler, has withdrawn its financial objectives for this year, mirroring the move by U.S. giant General Motors. The company made the majority of its profits last year from large SUVs and pickups in North America. Stellantis is also reportedly in discussions with the U.S. government.
The industry finds a glimmer of hope in Trump's recent announcement of a two-year exemption for certain auto parts from tariffs. "The U.S. government is sending a positive signal," said Hildegard Müller, the head of the VDA manufacturer association. However, she noted that these measures fall short of what's truly necessary. The burden on German manufacturers remains substantial.
Despite the ongoing struggles in the automotive industry due to trade tensions, Mercedes-Benz and Volkswagen are considering the impact of U.S. tariffs on their sports divisions. Mercedes is contemplating potential price increases and potential expansion in the U.S., while Volkswagen is exploring options to produce more cars domestically, including for their Audi subsidiary. However, the exact repercussions of tariffs on sports segments remain to be seen.
