Donald Trump’s threat to impose a 35-percent tax on every car imported from Mexico has the German auto industry on the defensive. For now, however, they are holding their nerve.
Volkswagen and Audi already produce vehicles in Mexico, and both BMW and Mercedes have plants under construction. If Mr. Trump did carry out his plan, every car sold in the United States would be at least $10,000 (€9,430) more expensive.
While the president-elect singled out BMW in interviews with the Times of London and Germany's Bild newspaper, the Bavarian carmaker has shown itself to be undeterred. Peter Schwarzenbauer, a board member, said on Monday that the company "sees no reason to modify the plan." Mr. Schwarzenbauer added that construction of the factory, which began in 2016, would continue as planned.
But the reality is that the Munich-based carmaker is taking a wait-and-see approach, closely observing both Mr. Trump's behavior and market development. While the president-elect's threatened punitive tariffs are one thing, the change in demand is another. The 3 Series sedan that will be built in Mexico is currently losing ground to SUVs manufactured in the United States. Every other BMW sold in the United States is now one of its SUV models, which the company produces exclusively in South Carolina. As U.S. operations chief Ludwig Willisch told Handelsblatt, the almost 10-percent decline in BMW's U.S. sales last year is partly attributable to an inability to deliver enough SUVs from its plant in South Carolina, .
This helps to explain why company sources, even before Mr. Trump's threat, were pointing out that the factory in Mexico would be "flexible." What this means is that production there could begin at a low level and that the planned capacity of 150,000 cars would certainly not be exhausted in 2019. The 3 Series is also built in Munich, Regensburg and China. If punitive tariffs are imposed, a return to exporting cars from Germany would make financial sense. It would also be especially gratifying to the employee representatives on BMW's supervisory board – the non-executive board that has to sign off on key management decisions – who were skeptical of the Mexico plans from the get go. BMW currently pays only a 2.5-percent duty on every car exported from Germany to the United States.
If you go down Fifth Avenue everyone has a Mercedes Benz in front of his house, isn’t that the case? The fact is that ... there is no reciprocity. Donald Trump, U.S. President-elect
BMW intends to make the new administration in Washington more aware of its involvement in the United States, where it builds more cars than it sells. Currently, the Spartanburg plant in South Carolina is on course to be the largest BMW production plant in the world, with 70 percent of the SUVs produced there bound for the export market.
The company is hoping that it will have the support of Nikki Haley, the staunch Republican is the governor of the economically underdeveloped state of South Carolina, who owes part of her success to the billions in investments from Munich. She is also Mr. Trump's choice for ambassador to the United Nations.
BMW also has some strong arguments to support its case. Preparations are now underway for the production of the X7, which is scheduled to begin in 2017 and is expected to increase capacity to 450,000 vehicles. To appease Mr. Trump, BMW could announce further expansion stages in South Carolina, as the company still lacks an engine plant in the NAFTA region.
Meanwhile, over at Audi, Chief Executive Officer Rupert Stadler has shown enthusiasm for production in Mexico. Audi began developing a plant in San José Chiapa in 2013 instead of using the VW plant in Tennessee. The decision served as a signal to the industry. Ford, Nissan and VW have been manufacturing cars in Mexico for some time, but Audi was the first premium producer to choose the country, where wages are lower than in China but from which companies can export goods to the United States without paying duties. BMW and Mercedes followed suit not long after.
The production of Audi's Q5 has already shifted from Ingolstadt to Mexico. A third of planned annual production of the car will be sold in the United States. By producing the Q5 at a lower cost, Audi hopes to be able to attack the BMW X5 and the Mercedes GLE models more effectively. BMW and Mercedes sell twice as many cars in the United States as Audi, which also has helped to place them ahead of the company in worldwide sales.
A 35-percent tax would get in the way of Audi's plans for U.S. sales – unless it agreed to build one of its models at the VW plant in Tennessee, which is currently operating below capacity. Audi is unwilling to comment on the current developments. The company, based in Ingolstadt near Munich, is pleased to have struck a deal with U.S. authorities over its involvement in the recent emissions scandal.
Meanwhile, Daimler Chief Executive Officer Dieter Zetsche has had a positive relationship with the United States since his stint at Chrysler. But he becomes tight-lipped when the talk turns to Mr. Trump. Daimler has been in good standing with every U.S. administration in the past, and according to statements made at the recent Detroit Motor Show, Mr. Zetsche expects this to continue in the future. However, that was before the future president's recent threats.
In his interviews published on Monday, Mr. Trump also pilloried the entire German auto industry. "If you go down Fifth Avenue everyone has a Mercedes Benz in front of his house, isn’t that the case? The fact is that ... there is no reciprocity," he said. "How many Chevrolets do you see in Germany?" the president-elect asked. "Not too many, maybe none, you can see nothing over there, it's a one-way street. It must work both ways."
While Daimler has not yet commented on the threat of punitive tariffs, internally, management believes it has strong arguments in its favor. Daimler employs more than 22,000 people at about a dozen production plants, and it last achieved annual sales in the United States of about €42 billion. Perhaps it will be to Mr. Zetsche's advantage that Chrysler was the main sponsor of Mr. Trump's TV show The Apprentice when he headed the former U.S. subsidiary.
In addition to cars, Daimler produces trucks buses and minivans in Mexico. The company only recently announced the construction of a new van production plant at a cost of around €500 million. Although the United States is the most important foreign market for the company, Daimler is also betting on Mexico, if only to keep up with Audi and BMW. Together with partner Renault, the company is building an automobile factory so that it can export the compact A Class series from there.
Volkswagen too will be extremely vulnerable if the new U.S. president introduces tariffs on cars imported from Mexico. The VW plant in Puebla, not far from the capital Mexico City, is one of the company's most important plants worldwide. About 600,000 cars can be produced in Puebla annually, and the company employs 15,000 people there.
Puebla is indispensable for VW's exports to the United States. About 200,000 cars are shipped from there to Mexico's northern neighbor each year, including VW's Gold models, the Jetta and the Beetle. Shipping cars to the United States from other plants – in Germany, for example – would be much too expensive.
VW also plans to produce its new, extended-wheelbase Tiguan SUV in Puebla. The vehicle is a few centimeters longer than the European version and is designed to satisfy the American need for size. The Tiguan Allspace is part of the SUV offensive that Volkswagen brand chief Herbert Diess announced for the U.S. market. The company plans to win back customers it lost because of the diesel scandal with its new SUV models. "North America is one of the keys to our future success," Mr. Diess said at the Detroit Motor Show.
Volkswagen hopes that in the end Mr. Trump will not make good on his tariff threats. VW argues that it is spending close to €1 billion to upgrade its Tennessee plant, and that thousands of new jobs will be created there. However, with an annual production volume of 150,000 cars, the U.S. plant is significantly smaller than Puebla. To placate Mr. Trump, VW could move portions of the Puebla production to Tennessee, where there is still room to expand. The shift could take years.
Markus Fasse currently specializes in aviation and automobile industry news. Martin Murphy covers the steel, car and defense industries for Handelsblatt. Stefan Menzel writes about the auto industry focusing on Volkswagen. To contact the authors: [email protected],[email protected] and [email protected]