The headwinds facing German carmakers just got stiffer with Friday’s start of a much steeper import tariff on U.S. car exports to China. The tit-for-tat trade move will hurt BMW AG and Daimler AG the most.
It’s yet another step away from the comfortable old world of carmaking revolving around production, price and market share. For decades, BMW, Daimler and Volkswagen AG came out on top in a global league churning out desirable cars for the masses and luxury buyers.
That order is fading fast. Germany’s carmakers are fighting on an unprecedented number of fronts: While trade tensions intensify, record spending is required for electric cars to keep up with emissions regulation, even if buyers remain on the fence. In Europe, VW’s diesel crisis lingers, and tougher tests on tailpipe exhaust and fuel consumption are holding back sales. Competitors from China and the tech industry encroach.
“Having secondary battlefields right now is making life very difficult” and depressing margins, said Peter Fuss, a partner at consultancy EY. “There’s a lot of pressure to have the most innovative ideas and not run the risk of being overtaken.”
Here’s a rundown of what’s raising the stakes for German producers right now:
Carmakers have dealt with tariffs for decades, building factories locally where rates are high, like in China. But the U.S.-China trade rumbles, and Trump’s June threat to hit cars from the European Union with a 20 percent levy, mark a sudden U-turn in a decades-long trend to lower barriers. Manufacturers have no way of quickly adjusting their value chain, prompting Daimler to issue a profit warning. Brexit is holding back car purchases in Europe’s second-biggest car market, and is a major worry for BMW’s U.K. Mini and Rolls-Royce plants.
“We have, again and again, proven that we can emerge stronger out of adverse conditions,” BMW Chief Executive Officer Harald Krueger said in response to questions from Bloomberg. “The automotive industry in Germany is capable of constantly renewing itself.”
Much of the record increase in research and development budgets is directed at electric cars to keep up with emissions regulation -- even if demand remains uncertain for now. Volkswagen has vowed to spend 20 billion euros ($23 billion) by 2030 on a lineup including the standalone I.D. brand. It’s earmarked another 50 billion euros to buy the batteries. Daimler is investing 10 billion euros to release 10 new vehicles by 2022, and BMW plans 12 battery-only cars by 2025.
“What counts during these times of volatility and rapid change is not losing sight of key trends,” BMW’s Krueger said. “We have the financial strength to invest into driving the mobility of tomorrow.”
Industry fallout from Volkswagen’s 2015 cheating on diesel emissions continues to hit hard. Diesel, central to carmakers’ strategy to meet tough EU rules on reducing fleet carbon dioxide emissions, is out of favor with buyers worried about city driving bans. More potentially costly action on emissions practices remains on the horizon, as Daimler and VW continue to face regulator scrutiny and lawsuits in Germany, the U.S. and elsewhere.
The EU is switching to a new certification procedure to give consumers and regulators data on emissions and fuel consumption that better reflects how cars drive in real-world conditions. While carmakers have long known about the changes, Volkswagen and Daimler are struggling with the switch. From September, all vehicles sold in the EU as well as Switzerland, Turkey, Norway and Ireland must meet the new standard.