Economic Plans

The German Carmakers' Fears

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Mercedes depends heavily on the U.S. market, but produces cars in Mexico. Will Trump change that? Source: Picture Alliance
  • Why it matters

    Why it matters

    Germany’s luxury carmakers depend on the United States for a large part of their revenue. If Donald Trump were to clamp down on trade, they could take a big hit.

  • Facts

    Facts

    • The United States is the largest foreign market for German carmakers outside of China.
    • BMW produces all of its cars for the North American market in the United States, while VW and Daimler have plants in the United States and Mexico.
    • Donald Trump has suggested he would impose import tariffs on carmakers that produce cars abroad. Hillary Clinton has sounded tough notes on trade but stopped short of tariffs.
  • Audio

    Audio

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When the United States elects a new head of state, the whole world is a captive audience. Even if the 2016 election might be decided more on the basis of domestic issues – or the polarizing personalities of the two candidates, Hillary Clinton and Donald Trump – the consequences also have a global dimension, both politically and economically.

Germany’s vaunted automakers will be watching closely, too. The United States is their second-most important market for sales abroad – just after China.

And this may matter more than others from the past. Whether the likes of Daimler, Volkswagen and BMW will succeed depends in part on the next occupant of the White House.

And many of them are worried: European businesses can expect a tougher climate from the next president – and not just in the case of a victory by the nightmare of many business leaders, Mr. Trump. Ms. Clinton too has pledged to push harder for America’s interests.

The economic programs of both candidates – as different as they may be – are “positively bursting with protectionist tendencies” when it comes to trade policy, said Volker Treier, head of foreign trade at the German chamber of commerce and industry, the DIHK.

That could have particularly serious consequences for Germany, which last year had more trade with the United States than with any other country.

“It opens the door to advocates of protectionism if too much of the value chain, including jobs, leaves the country, while the revenues continue to be generated in the United States.”

Stefan Bratzel, Professor of automotive business

In 2015, the trading of goods between Germany and the United States amounted to €173.2 billion ($193 billion). That means the United States has replaced France as Germany‘s most important trading partner for the first time in four decades.

One of Germany‘s most important industries is, of course, automobile manufacturing. The country’s own Big Three of BMW, Mercedes and VW don’t just export their automobiles to the United States, they also produce certain models there – partly for the local market and partly for global markets.

The automobile industry is one example of the influence those wielding power in Washington, D.C. can exert on German companies and their business.

A prime example is the diesel-emissions scandal at Volkswagen that broke last year, prompting U.S. authorities to broker a whopping $15-billion settlement with the company. The Justice Department is considering separate charges and fines.

Despite Dieselgate, there has hardly been any reference to German automakers during the U.S. election campaign. Ms. Clinton and Mr. Trump have concentrated far more on domestic industrial giants – but that too could have serious consequences for some German automakers.

Up to now, there has been less focus on what the automakers produce, but where they produce it. Ford, General Motors and Chrysler have all become connected to a tense debate about free-trade in these elections. Donald Trump in particular has attacked existing deals like the North American Free Trade Agreement (NAFTA), and pending ones like the Trans-Pacific Partnership (TPP) with Asia and Transatlantic Trade and Investment Partnership (TTIP) with Europe.

One thing is for sure: Neither of the two candidates actively supports free trade like the incumbent President Barack Obama.

Both the Democrats and the Republicans are concerned about American jobs. Ford has repeatedly been in the spotlight: In April the automaker announced it was building a factory costing $1.6 billion – not in Michigan or in the lower priced U.S. southern states, but in Mexico. In September, Ford went a step further: In the next 2 to 3 years it plans to move the entire production of small cars to Mexico, company boss Mark Fields told investors.

“We cannot allow something like this to happen,” Mr. Trump said at an election campaign event last month. “They produce their cars, they employ thousands of people, but not from this country, and then they send their cars across the border.”

It’s an issue he’s returned to time and again since, and followed up with threats too: If the automaker moves jobs out of the United States in a southerly direction, he’s said he will impose import duty of 35 percent on products from Mexico.

It is not just because of individual statements like this that Stefan Bratzel, a professor of automotive business at a private college in Bergisch-Gladbach near Cologne, thinks a President Trump would be disastrous news for the economy and the automobile business.

“The marked tendency toward protectionism in particular could inflict massive long-term damage to both the U.S. and the global economy,” he said.

So who might profit from a Trump presidency? Based on his statements, BMW might have an advantage: The Munich-based company has all its key production facilities in the United States.

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BMW has plants in South Carolina and intends to make a plant in Spartanburg, PA, its largest in the world. Source: Daniel Schnettler / DPA

By contrast, their German competitors also produce in Mexico. VW meets some of the demand from North America out of its Mexican factory in Puebla. VW subsidiary Audi’s factory in San José Chiapa, which has just been opened, is producing the second generation of the SUV Q5. Daimler is building a factory in Aguascalientes in partnership with Japan’s Nissan. The plan is to produce compact cars there for Mercedes-Benz and Infiniti.

Some of these decisions fall right into Mr. Trump’s campaign rhetoric. The choices to build these factories were made against the background of free trade functioning in the NAFTA region.

If Mr. Trump imposed punitive import duties, big or small, that would upset all the planning done up to now regarding sales figures, capacity and profit margins in North America. Hillary Clinton by contrast has not called for punitive tariffs, though she does say changes to the NAFTA system are necessary.

The majority of cars produced by German automakers in Mexico are intended for the U.S. market. That leaves them vulnerable: It’s important to actually sell the cars that are produced.

“Quite apart from Trump, it opens the door to advocates of protectionism if too much of the value chain, including jobs, leaves the country, while the revenues continue to be generated in the United States,” Mr. Bratzel said.

“For automobile manufacturers it is important to maintain a good balance when making long-term decisions about production facilities,” he said. The election result could therefore be more important for importers than for domestic U.S. manufacturers.

So how important is the U.S. market for German automakers depends on the manufacturer.

One thing is for sure: Neither of the two candidates actively supports free trade like the incumbent President Barack Obama.

Even before the Dieselgate emissions scandal, Volkswagen was a niche player in the United States. The world’s second-largest carmaker is far more dependent on China for its sales abroad.

It’s not that they haven’t tried in the United States. In the plans of former VW boss Martin Winterkorn, who was forced to resign over Dieselgate, the United States was to play a decisive role in the company’s aspirations to become the world’s biggest automaker by 2018.

The U.S. market was to be conquered with reasonably priced and economical diesel engines. Some people see in this ambitious expansion the source of the Dieselgate scandal – VW installed cheat software in its diesel cars to cut costs.

But even with the manipulated engines, diesel didn’t have the impact they expected in the United States, partly because of faulty model planning and poor sales performance. This meant that the planned U.S. offensive was way below expectations. Now, an SUV is to be developed specially for the U.S. market – only with gasoline engines, of course.

The situation is different for Germany’s premium manufacturers. While VW relies more on Asia, BMW’s sales in the United States were only just below those in China in the second quarter of this year. It depends on the U.S. for 20-22 percent of its total revenue.

At Mercedes-Benz maker Daimler, the lead of China over the United States is bigger. But the Stuttgart-based company’s U.S. business is still of particular significance: Daimler is present in the market with different brands, including utility vehicles, which generate nearly 26 percent of all revenues in the United States – in China it is only about 10 percent.

The big German firms haven’t always been producing in North America. For many years, the United States was purely an export business for German automakers.

Volkswagen closed what was at the time its last U.S. factory in Pennsylvania in 1988. It wasn’t until the mid-1990s that Daimler and BMW set up their own production facilities in the southern states.

VW for a long time was serving the U.S. market with automobiles from its Mexican factory in Puebla. Volkswagen didn’t open another U.S. factory until 2011 in Chattanooga, Tennessee, where the U.S. version of the Passat is made, soon to be followed by the production of the special U.S. mid-size SUV Atlas.

Including all its truck factories of different group brands, Daimler has the most U.S. factories – but it only produces Mercedes automobiles in Vance, Alabama. Both Mercedes and premium competitor BMW are focusing their U.S. production on SUV models which are in demand there – also for export.

BMW has been by far the most ambitious. With the exception of the small X1, which is produced in Leipzig, all of its X models are manufactured in the United States. For example, every X3 seen on German roads comes from Spartanburg, South Carolina. This factory is currently being expanded, and in future, the extra-large SUV X7 will also roll off the production line there.

The expansion will make Spartanburg the biggest BMW production facility in the world – even bigger than its main factory in Dingolfing near Munich.

In other words, BMW has the most to gain – and the most to lose – from any fissures on the U.S. car market after the elections.

 

This story first appeared in the German business weekly WirtschaftsWoche, a sister publication of Handelsblatt. To contact the author: sebastian.schaal@wiwo.de

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