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German Carmakers Face Huge Profit Hit If 25% Tariff Imposed

German Carmakers Face Huge Profit Hit If 25% Tariff Imposed.

“We estimate a total of about 650,000 of these sales would be lost, with the luxury segment losing 90% of imported sales. The German manufacturers would be the most disadvantaged”

If President Trump imposes a 25% tariff on auto imports, European carmakers like BMW, Mercedes, and Volkswagen’s Audi and Porsche would lose about 90% of their high profit margin sales of imported luxury vehicles, according to a report from investment bank UBS.

The tariffs, which would also hit products from South Korea and Japan as well as the European Union, would cut overall U.S. car sales by about 11%. General Motors, Fiat Chrysler Automobiles (FCA) and Ford would be big winners, according to the report.

The U.S. Commerce Department is expected to report by February 17 on whether automotive imports constitute a threat to U.S. national security. If the finding is affirmative and a 25% tariff is imposed, European imports are vulnerable because Germany in particular has built up a big trade surplus. And Trump has expressed dismay at the current arrangement, which allows Europeans to sell cars and SUVs in the U.S. with a 2% tax, while for U.S. products in Europe there is a 10% tariff.

Trump agreed with European Commission President Jean-Claude Juncker at a meeting in Washington in July to hold off new duties while the two sides work toward reducing tariffs and non-tariff barriers on industrial goods shipped between the European Union and the U.S.

The trouble is, the EU wants a comprehensive free trade deal which could take years to negotiate, while Trump wants action fast to solve the obvious injustice of the auto tariff imbalance.

Commerce Secretary Wilbur Ross told the Financial Times in an interview in December that the U.S. was intent on correcting a trade imbalance in cars that was a relic of the post-war years.

Painful for others

“The whole purpose of the president’s tariffs (policy) is to create a situation where it is more painful for other countries to continue their predatory practices than to reduce them, it’s the only tool we have,” Ross told the FT.

The trouble is, tariffs would also hit U.S. workers, and hit overall U.S. car sales.

The UBS report expects the Commerce Department to agree action is required. The President then will have 90 days to impose tariffs or a quota. UBS expects a 25% tariff on EU vehicle imports, but parts and imports from non-EU countries to be excluded. Meanwhile bills were introduced last week in the Senate and the House to end the President’s ability to use national security as a reason for curbing imports.

UBS said in 2017, 1.2 million vehicles were imported to the U.S. from Europe, of which 630,000 were luxury and 610,000 mass market vehicles.

“We estimate a total of about 650,000 of these sales would be lost, with the luxury segment losing 90% of imported sales. The German manufacturers would be the most disadvantaged,” the report said.

Mass market segments wouldn’t be hit so hard.

“The mass market segments have lower loyalty and we assume only about 15% of sales are lost in these segments. We estimate about 85,000 of the 610,000 mass market import sales are lost due to tariffs. Including lost luxury sales, we estimate tariffs on EU imports would reduce U.S. sales by 650,000,” the report said.

The UBS report summed up the impact of a 25% tariff on U.S. auto sales across sectors –

  • Luxury  Vehicles – We assume 75% of luxury buyers will remain loyal and will  delay  their  vehicle  purchase  rather  than  buying  a  substitute.  Of those willing to substitute, we assume only about 50% will find a vehicle that suits their needs.
  • Mass  Market  Cars – We assume 15% of car buyers will remain loyal and will  delay  their  vehicle  purchase  rather  than  buying  a  substitute. Of  those  willing  to  substitute  we  assume  all  will  find  a  vehicle  that  suits  their  needs  given  the  large excess car capacity. That said, small car capacity is tighter, so customers may need to shift toward mid-range cars to find more options.
  • Small  SUV – We  assume 10%  of  small  SUV  buyers  will  remain  loyal  and  will  delay  their  vehicle  purchase  rather  than  buying  a  substitute.  Of  those  willing to substitute we assume only about 60% will find a vehicle that suits their needs given the limited small car capacity in the U.S. Buyers will likely need to move toward the mid SUV segment.
  • Mid SUV – We assume 10% of mid SUV buyers will remain loyal and will delay their vehicle purchase rather than buying a substitute. Of those willing to substitute we assume all will find a vehicle that suits their needs. 
  • We  assume  10%  of  other  car  buyers  will  “remain  loyal”  and  will  delay their vehicle purchase rather than buying a substitute. Of those willing to substitute we assume about 95% will find a vehicle that suits their needs given the available capacity.

Any action to curb sales to the U.S. would be devastating for the European industry, already hit hard by falling sales in China, a weakening European economy, Brexit, tightening rules on fuel economy, and the need to fund big the changeover from internal combustion engines to electric and perhaps fuel cell power. 


 

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