German premium brands are setting up shop there even though in the past they would have worried that selling luxury cars made in Mexico could damage their brands' images. Audi began building the Q5 in September in San Jose Chiapa, while Mercedes' compact cars will roll off assembly lines in Aguascalientes next year. Many will be shipped over the U.S. border judging by the healthy demand for the CLA and GLA models.
On-the-ground reporting from Germany's biggest-selling newspaper, Bild, shows how much low labor costs play a role. The daily interviewed Mexican construction workers who lost their low-paying jobs last month when Ford cancelled its investment in a half-finished plant in San Luis Potosi. BMW is constructing a 3-series sedan factory nearby and workers earn a third more than the Ford plant construction workers did, but that still left them with just 80 cents an hour. Instead of talking about low wages as the reason for choosing Mexico, BMW executives prefer to focus what the company calls "landed costs," which include logistics and energy prices as factors. A cynic might say such talk was an attempt to divert attention from worker pay.
Last week at a reception of the VDA German auto industry association, Germany’s Transportation Minister Alexander Dobrindt and VDA President Matthias Wissmann both called on Washington to promote free trade. More than 500,000 cars built in German factories last year were shipped to the U.S., which is Germany's second-largest export destination after the UK. Few value chains are also more global than the automotive industry with manufacturers and suppliers dotting the world production map.
It’s entirely possible that the Trump administration’s focus on auto plants in Mexico may shift to Germany as a global export hub overall. Auto industry executives should be alarmed after Trump's newly appointed trade czar, Peter Navarro, told the Financial Times this week that Europe’s largest economy uses a "grossly undervalued" euro to "exploit" the U.S. and its EU partners.
Navarro effectively likened Germany to a parasite whose policies impoverish trading partners and suck dry their neighbors’ wealth: a zero-sum theory of global trade where one’s gain is automatically the other’s loss. The comments come very close to implicating Germany as a dreaded "currency manipulator," an official status that opens the door to retaliatory trade measures.
Porsche fears that it too may become a target for Trump's tariffs on cars exported to the U.S., its second largest market, since it builds the bulk of its cars in Germany. "I would hope that Trump would draw a distinction between [a low wage country like] Mexico and Europe, from where we have been exporting for the past 60 years, but I cannot rule out that he won’t,” said a senior executive at the sports-car maker.
As easy as it is to see why free trade opponents criticize emerging economies such as Mexico or China, with their abundant supply of cheap labor, it’s far harder to understand their anger when it comes to Germany. A developed first world country, it has higher non-wage labor costs than the U.S. and competes on innovation instead of price.
Germany has less ability to manipulate its currency than its Atlantic partner, as it doesn’t even control its own monetary policy, much less possess the ability to devalue as China can. And while labor unions have worked together with industry in the past to keep a lid on wages during lean years, these are negotiated between free market participants that are under no obligation to be frugal in their dealings.
'Air of superiority'
Back in Berlin last week there was an unmistakable air of superiority and self-satisfaction that evening among the 600 guests at the VDA reception, proud of the international success of Germany’s car industry. Participants laughed at Trump’s ignorance for questioning why no one sees any Chevrolets driving through Germany. No one from General Motors apparently informed him that Detroit pulled its storied American brand from Europe last year for lack of success. Moreover, luxury cars such as BMWs do not grab market share from U.S. competitors through Chinese-style price dumping.
"That’s a free market economy, that’s competition," one attendee said, summing up the sentiment in the room. He is right. Attacking BMW, Daimler or Volkswagen, each of whom maintains a manufacturing plant in the U.S., won’t solve anything.