Volkswagen Group and other automakers warned that trade tensions risk dragging the global economy into a recession as the fallout starts to hit consumers.
The gloom of the U.S. and China’s tit-for-tat tariffs cast a shadow over the Frankfurt auto show this week, where automakers were seeking to whip up interest in critical new electric models. The geopolitical volatility adds another layer of uncertainty to an industry in the midst of a radical overhaul as the end of combustion-engine era looms.
“We come now into a situation where this trade war is really influencing the mood of the customers, and it has the chance to really disrupt the world economy,” Volkswagen CEO Herbert Diess said in an interview with Bloomberg TV. “China is basically a healthy market, but because of the trade war, the car market is basically in a recession. So that’s a new situation. That’s scary for us.”
Concerns about global trade have reached nearly 10 times the peaks seen in previous decades and could shave about 0.75 percentage points off world economic growth this year, according to data compiled by the International Monetary Fund. The auto industry is particularly exposed because of its global network of assembly plants and parts suppliers. Daimler, for instance, makes many of its Mercedes-Benz’s SUVs in Alabama and exports them to China and other markets.
“What will happen in 2020 will very much depend on what happens with the U.S. and China in the coming weeks,” BMW Group CFO Nicolas Peter said in an interview with Bloomberg TV at the Frankfurt show. The automaker makes most of its SUVs in South Carolina.
After months of talks, the tensions between the U.S. and China remain high. Ted McKinney, the top trade official in President Donald Trump’s Agriculture Department, called Chinese President Xi Jinping a “communist zealot” in the mold of Mao Zedong. After a summer of bombast and tariff escalation, the two sides have agreed to hold face-to-face, working-level staff talks in the coming weeks and a ministerial meeting in Washington in early October.
On top of the U.S.-China spat and Trump’s recurring threat to impose levies on European car imports, the industry is bracing for the potential of the UK crashing out of the European Union without a deal in a few weeks.
BMW, which owns the British-based Mini and Rolls-Royce car brands, has set up a 300 million-euro ($331 million) fund to deal with a possible hard Brexit and will look to slow and temporarily halt production at its Mini factory in Oxford, England, CFO Peter said.
In a Bloomberg TV interview, PSA Group CEO Carlos Tavares called the prospect “not acceptable” on ethical grounds and appealed to European and British leaders to show “good sense” and avoid a no-deal Brexit.
For the auto industry, the trade squeeze clouds efforts to show off slick new models like the Porsche Taycan and VW ID3 as German brands ramp up electric offerings to meet increasingly stringent environmental regulations. Demand disruptions threaten to squeeze profits needed to fund the high-risk rollout.
“We hope there won’t be any recession in the midterm or long term, because it would be a self-made recession,” Diess said.