F Ford Motor Company

By William Boston 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (June 22, 2018).

BERLIN -- Global auto stocks were pummeled Thursday after Daimler AG issued a profit warning overnight that the Mercedes-Benz owner pinned on trade tensions between the U.S. and China.

Daimler warned that Chinese retaliatory import duties on cars built in the U.S. would hurt sales of its sport-utility vehicles in the world's largest auto market. Its shares fell 4.3%, and investors anticipated trouble for other car makers, including the two other German auto giants, BMW AG and Volkswagen AG. In U.S. trading, General Motors Co. Fiat Chrysler Automobiles NV, Ford Motor Co. and Tesla Inc. took a hit as well.

German auto makers build tens of thousands of SUVs in the U.S. for export to China, and it appears new Chinese tariffs could hit them harder than American manufacturers that Beijing explicitly targets. With global supply chains designed for a world of open trade and low tariffs, Germany's auto giants are being caught in the crossfire with few opportunities to shift sales to more welcoming markets.

"Uncertainty and chaos have consequences, and we're starting to see that, " said John Bozzella, head of Washington lobbying group Global Automakers and Here for America, a coalition of companies including Mercedes-Benz, BMW and Honda Motor Co., among others.

Thomas Sedran, Volkswagen's strategy chief, said he didn't want to speculate about how the company would respond to higher U.S. and Chinese tariffs, or trade tensions between the U.S., Mexico and Canada. He did, however, acknowledge that Volkswagen, the world's biggest auto maker by sales, had few routes of escape.

"Shifting production on short notice is not possible, it's not feasible. At the end of the day this will have an impact on the pricing of vehicles. At this stage we are in a more reactive mode," he said.

A BMW spokesman said the company was exploring a "variety of scenarios and strategic options," but wasn't making any changes yet. "The company's business outlook remains unchanged," he said, adding that its forecasts presume "global economic and political conditions do not change significantly."

In May, China said that as of July 1, it would cut tariffs on vehicle imports to 15% from 25% to quell U.S. complaints of a trade imbalance. But after President Donald Trump went ahead and ordered import duties on billions of dollars of Chinese goods, Beijing said it would maintain its longstanding duty on U.S.-made vehicles and threatened to take it even higher.

German auto makers such as BMW, and Daimler's Mercedes-Benz, as well as electric-car maker Tesla and Ford, would have benefited from the lowering of Chinese duties. About 267,000 U.S.-built vehicles were sold in China last year, according to research firm LMC Automotive.

Ford exported 45,000 vehicles, including Mustang sports cars, Explorer SUVs and some Lincoln-brand models. The company said Thursday that it is continuing to encourage both governments to work together.

For Tesla, China has become its second-biggest market and a critical one as the electric-car company seeks to transform into a mass-market auto maker. Last year, Tesla sold about 15,000 U.S.-made cars in China, with its revenue there doubling to $2 billion even with the 25% tariffs as Chinese consumers have been willing to pay well above the sticker price.

Fiat Chrysler and General Motors would likely be less affected by a higher import duty. Fiat Chrysler last year exported roughly 17,000 American-made vehicles to China, building many of its lower-end SUVs in the country. GM exports only a few hundred niche vehicles to the country, relying largely on locally made product for what is its largest market. GM said in a statement that it is assessing the potential impact of the various trade and tariff actions.

Toyota Motor Corp., Japan's largest auto maker, doesn't export at all from the U.S. to China.

Daimler called China's import tax on U.S. autos the "decisive factor" for lowering its earnings projection. "This effect cannot be fully compensated by the reallocation of vehicles to other markets," it said in a statement late Wednesday. The company declined to comment further.

But given that the U.S. and Chinese trade threats are still shaking out, some analysts wondered if Daimler was using the tariffs as a smoke screen to conceal problems with its product lineup.

"We find it curious that Daimler should act now," said Arndt Ellinghorst, an analyst at Evercore ISI, a London-based brokerage. "Could it be that the company's aging SUV portfolio is experiencing lower sales and higher costs than expected across the board, irrespective of the ongoing trade discussions?"

Still, Daimler's profit warning is one of the first signs that Mr. Trump's trade actions are fueling a retaliation that is hurting manufacturers in the U.S. that send their products abroad.

Trading policies that threaten auto makers' bottom lines could have negative ripple effects throughout the U.S. supply chain and across the industry, Global Automakers' Mr. Bozzella said. "Even if the logic is we're trying to invite a negotiation, the unfortunate reality is then the U.S. worker becomes a bargaining chip."

The German auto industry has long made a huge bet on China -- and on U.S. production. BMW and Mercedes-Benz generate about a quarter of their unit sales in China, with a large portion of those vehicles exported from their factories in Europe and North America.

Daimler, BMW and Volkswagen now operate four manufacturing plants in the U.S. that employ 36,500 American workers. Last year, the German companies produced 804,200 vehicles at those plants, but less than half were sold in the U.S. The rest, around 480,911 vehicles, were exported to Canada, Mexico, Europe, China and other markets.

Of the 594,000 vehicles that BMW sold in China last year, including its top-line sedans and SUVs, around 194,000 were imported. Just under 100,000 of those vehicles came from BMW's plant in Spartanburg, S.C., the company's main production site for its X-series line of SUVs, which produced 371,000 vehicles last year.

Though not related to the U.S. tariff moves, BMW is already shifting some U.S. SUV production, a portion of its X3 output, to China rather than continue to export those vehicles from the U.S. An acceleration of this trend could mean job losses in the U.S.

Volvo, the Chinese-owned Swedish premium car maker, opened its first U.S. manufacturing plant in South Carolina this week. The plant will manufacture Volvo's new S60 luxury sedan and already employs 1,200 workers. By the end of the year, that number will rise to 1,500, Volvo CEO Hakan Samuelsson told The Wall Street Journal. In three years, Volvo plans to add a second model and boost employment to 4,000 people.

"But half of those people will build cars for export," said Mr. Samuelsson. "Those jobs would be in jeopardy if trade is restricted. We hope that will not happen."

--Mike Spector, Tim Higgins and Christina Rogers contributed to this article.

Write to William Boston at william.boston@wsj.com

(END) Dow Jones Newswires

June 22, 2018 02:47 ET (06:47 GMT)

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