Mercedes-Benz First German carmakers shrug off Trump’s warnings

Forget Donald Trump’s threats to BMW, Mercedes-Benz and VW: German car sales in the US thrived last year and Mexican production is alive and kicking.
Walk on by.

Donald Trump scared the hell out of German carmakers and all their rivals in January last year. The then-president-elect threatened carmakers with a 35 percent import tax for every vehicle shipped into the US. “I would tell BMW that if you are building a factory in Mexico and plan to sell cars to the USA, without a 35 percent tax, then you can forget that,” Mr. Trump said in an interview. It led to falling stocks of VW, BMW and Mercedes-Benz-maker Daimler and raised fears of a US trade war with the rest of the world.

A year later, not much remains of the US president’s threats. True, his administration is renegotiating the North American Free Trade Agreement with Mexico and Canada, but business is still strong, at least for the German auto industry. The likes of VW and BMW jointly sold 1 percent more cars in the US last year, despite a decline in the overall market. “2017 was a good year for us in the USA,” Matthias Wissmann, president of the German Association of the Automotive Industry, VDA, said on the sidelines of the Detroit motor show.

BMW and Daimler, which both produce cars in the US as well as import them from abroad, expect windfalls of up to €1.5 billion ($1.8 billion) thanks to Mr. Trump’s tax changes. “I don’t comment on every statement or tweet. I’d rather look at the facts. And I see that the tax cuts are working,” Mr. Wissmann said.

We keep investing in our Chattanooga plant in the state of Tennessee, and we will continue to produce in Mexico. Herbert Diess, CEO, VW passenger cars

German carmakers seem to agree. At the Volkswagen Group, things are looking far less bleak than 12 months ago. “Of course, we are concerned about Nafta,” Herbert Diess, CEO of VW passenger cars, said in Detroit. But he added that VW thinks its business “will not be disturbed in the long term” due to political developments, and it plans no major reorganizations. “We keep investing in our Chattanooga plant in the state of Tennessee, and we will continue to produce in Mexico,” said Mr. Diess. VW manufactures the key Jetta sedan at its factory in Puebla, Mexico.

Daimler CEO Dieter Zetsche, known in the US as Dr. Z, was diplomatic when asked about Trump, and said there was nothing a company could do about politics. “We have to make the best of it, whether in the USA, China or Germany,” he said in Detroit.

Jörn Buss, a car industry expert at consultants Oliver Wyman, emphasized the benefits of the Trump tax reform for carmakers and downplayed last year's worries. “Things are never as bad as they seem,” he said.

In Mexico, too, things are still running smoothly. Mexican factories are making more car than ever: Overall production leapt 8.9 percent in 2017 to a total 3.77 million vehicles. Car exports rose 12.1 percent, to 3.1 million cars, of which three quarters were sent over the border to the United States.

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Of course, worries about Nafta remain. “Nafta abolition causes the biggest headaches for carmakers” said Mr. Buss, the car industry consultant. Mr. Trump still threatens to pull out entirely from the deal, which came into force in 1994, if a renegotiation is unsatisfactory. He blames the trade agreement for a loss in US manufacturing jobs.

Both US and German carmakers rely heavily on Mexican production, and want to avoid any substantial change. Mary Barra, CEO of GM, said in Detroit she is hopeful that a “modernized Nafta” will be agreed. Mr. Wissmann, the VDA president, said he is confident: “We hope to have an agreement on a new treaty before Mexico’s elections in July.”

Despite the uncertainty, most carmakers continue to invest in Mexico. Last year, Ford publicly abandoned plans for a new Mexican manufacturing facility, but it has since changed its plans and is boosting production in Mexico and China.

BMW, whose biggest global plant is actually based in Spartanburg, South Carolina, had already immediately said after Mr. Trump’s remarks last year that it would continue building a factory in San Luis Potosí, Mexico. The new plant is scheduled to start production next year and make BMW’s new 3-Series, the carmaker’s best-selling model, for the global market.

Katharina Kort is a Handelsblatt reporter based in New York. Stefan Menzel writes about the auto industry focusing on Volkswagen. To contact the authors: [email protected] and [email protected]