President Donald Trump's threat to raise tariffs on Chinese imports to the U.S. to 25 percent from 10 percent and potentially expand the amount of goods affected, will cause aftershocks for Germany's automakers.
China has been a gold mine for Daimler, Volkswagen and BMW as vehicle sales rose at a double-digit rate for years, overtaking the U.S. as the largest global market for cars. Due to the big volumes of cars sold there, profits are also enormous.
VW Group's two joint ventures with FAW in north China and Shanghai Automotive in the south of China posted higher earnings than any other of the automaker's businesses last year including Porsche and Audi.
Trade tensions with the U.S. broke this near 30-year period of uninterrupted growth as the consumer appetite among China's burgeoning middle class suddenly soured. Sentiment could not even improve materially despite the government's largest ever tax relief program. The three-percentage point reduction in VAT that automakers passed on fully to Chinese customers only managed to slightly resuscitate demand, according to VW brand sales chief Juergen Stackmann, who tracks his brand's exact volumes in China every day. Key was dispelling the storm clouds over the economy that emerged with the trade war.
Trump's threat could undermine the fragile return in consumer confidence in China.
Up to now, German auto executives had been largely sanguine. An off-year was bound to happen and some even saw silver linings resulting from the dispute, including an opportunity to grab market share from weaker competitors. For example, China dramatically eased its import tariffs for European-built cars, gifting Porsche a strong second half. The government also liberalized its requirement limiting foreign automakers' ownership over their joint ventures, prompting BMW to seize the opportunity to seal a deal for control over its joint venture with local partner Brilliance.
Both were seen as concessions that might not have come to be, at least not so soon, without Trump's belligerent stance toward China.
Nonetheless, Germany's automakers had been banking on a resolution to the dispute, expecting news of an agreement between the U.S. and China was just around the corner. This would then jumpstart a market that had seen an 11 percent slump in sales through the first quarter, data from LMC Automotive shows.
A massive expansion on duties levied on Chinese goods imported into the U.S. was the last thing on their radar screen. White House officials justify the surprise move by claiming Beijing was backsliding on commitments China had made.
"This is the most significant escalation of the US-China trade war to date," a Bank of America Merrill Lynch economist told the Financial Times.
Trump's risky strategy of bringing talks to a head could either prompt China back to the negotiating table or potentially collapse the negotiations. Trump's threat effectively gives China only days to reach a new negotiating position ahead of the Friday deadline.
If the tactic backfires, it could force a dramatic revision in production targets for German automakers in China and prompt them reduce inventories in preparation for a longer, leaner year than previously believed.
BMW CEO Harald Krueger tried to give a positive spin to the dispute. During an earnings call on Tuesday, he said: "Naturally there will be an effect if trade difficulties between China and the US re-emerge, that will impact our business, but I believe the will is there on both sides to reach an agreement."