May 10, 2019 06:00 PM / Fitch Ratings
BMW's and Daimler's sales are likely to be most affected in the automotive sector were China to increase import tariffs in retaliation for expected higher US tariffs, Fitch Ratings says. This could put pressure on earnings and spur the manufacturers to adjust their production bases to align with their end-markets, weighing further on the groups' capex and cash generation in the medium term.
In isolation, the risks of the intensifying China-US trade war have a limited rating impact on all global carmakers. However, they could exacerbate other structural trends reshaping the industry and manufacturers' individual credit vulnerabilities.
About 15% of all BMW's sales in China are imported from the US, while 8-10% of Daimler's cars sold in the country are US-manufactured. Therefore, their sales volumes could be significantly affected if the manufacturers pass on price increases to cover higher tariffs. Premium brands are the most exposed to changes in global import duties because of their higher manufacturing mismatch compared with most mass-market carmakers. In 2018, both groups recorded a sharp reduction in US exports due to the tariff increases and a refocusing of production in China. By contrast, other global carmakers, including VW, Ford, GM, Toyota and HMC/Kia, largely manufacture their Chinese sales locally.
A fresh escalation of threats by the US to raise tariffs on all Chinese imports to 25% increases the chances of retaliatory measures from China. We expect some groups, which currently rely on their global supply chains, to rethink their manufacturing footprint to further align their production base to their end-markets. Most manufacturers have significantly increased their share of local production in China. Even BMW and Daimler now manufacture locally with their Chinese JV partners more than 70% of the vehicles they sell in this market, from 30-40% less than a decade ago. Daimler has plans to invest about EUR1.5 billion jointly with its partner BAIC in a second facility in Beijing, which will produce more models focused on the Chinese market's needs, including EVs.
The export of China-made cars to the US or Europe remains limited for most global brands; because of growing trade protectionism, automakers could hold back from allocating more production capacity to China to serve international markets. In 2016, GM started exporting the Buick Envision to the US but higher duties could make this proposition too expensive to remain viable. In 2018, Ford cancelled plans announced only the previous year to move production of the Focus to China from the US.
BMW and Daimler are also heavily exposed to commercial tensions between the US and Europe, as 14% of their automotive sales are in the US, with only 30-40% of these manufactured locally.
Jaguar Land Rover (JLR) is most at risk of a trade war between China and Europe, although this is not currently anticipated, as it imports a significant share of cars sold in China from European plants. It would also be hit by increased US tariffs on cars imported from Europe as it does not have any US production, contrary to its German peers, BMW and Daimler.
Since early 2018, import duties between China and its key trade partners have been the focal point for global carmakers, distorting sales and affecting revenue and earnings. Beijing increased tariffs on US imports to 40% in July 2018 from 25%, which hit volumes by increasing vehicle prices in China. Tariffs on European car imports were cut to 15% in May 2018 from 25%, causing customers to delay purchases in anticipation of further price reductions from lower duties on these and Japanese-made vehicles.
Furthermore, customers claimed price reductions on products purchased after the announcement of lower tariffs, which were imported by dealers before the lower tariffs were enacted. This meant that dealers had to discount vehicles to clear their inventories constituted before the change in tariffs.