Mon | Dec 10, 2018

German autos are unlikely victims in tariff fight

Published:Friday | April 20, 2018 | 12:00 AM
In this January 12, 2012, file photo A BMW X 3, is driven out onto a stage area in Spartanburg, SC. If a trade spat between the US and China escalates and both countries raise tariffs, American automakers won't suffer that much. But German luxury automakers BMW and Mercedes will. BMW exports about 87,000 luxury SUVs from a factory near Spartanburg. (Michael Justus/The Spartanburg Herald-Journal via AP, File)

At the edge of the Blue Ridge Mountains sits a sprawling factory that has become an unlikely victim in the escalating trade fight between the United States and China.

The plant near Spartanburg, South Carolina, is owned by German automaker BMW, and it exports more vehicles to China than any other auto factory in America.

The six million-square-foot plant makes luxury sport utility vehicles, which are coveted by affluent Chinese buyers for their German prestige and reliability that's better than Chinese domestic brands. One in every four SUVs that comes off its assembly lines is shipped to China.

Now those 87,000 vehicles could be subject to extra tariffs that could add tens of thousands of Chinese yuan to their already-lofty prices.

The Trump administration has released its list of imports from China worth US$50 billion on which it would impose 25 per cent tariffs as punishment for China's alleged theft of US intellectual property. China retaliated with its own threatened tariffs on US$50 billion worth of US products, including autos.

Hardest hit

If both sides make good on

the threats, German luxury automakers, rather than American companies, will be hit the hardest. American and Japanese automakers produce most of what they sell in China at factories located there.

In addition to BMW's South Carolina factory, a Mercedes plant in Tuscaloosa County, Alabama, ships as many as 75,000 pricey GLS and GLE SUVs to China.

Because the German vehicles - with leather seats, heated steering wheels, sunroofs and other goodies - command high prices in China, the current 25 per cent tariff on autos shipped in from the US doesn't seem that outrageous.

However, if the tariff doubles to 50 per cent of the manufacturing cost as China has threatened, the German vehicles could be priced out of the market, forcing the companies to make them in China or elsewhere.

A BMW X5 large SUV, for example, starts at US$57,200 in the US. The cost to manufacture a high-priced SUV is roughly 30 per cent below the sticker price. At 25 per cent, the tariff would be about US$10,000, or 63,020 yuan, on an X5 entering China. It would double to US$20,000 (126,040 yuan) if the tariff doubles.

Trump has threatened to add US$100 billion more in tariffs if China retaliates against the US. It's not clear yet what products that would cover.

Realising what's at stake, BMW put out a statement supporting free trade and warning that a conflict could hurt its factory, which exported 70 per cent of the 371,000 SUVs it made last year to 123 countries. One-third of the exports went to China.

Harmful for stakeholders

"Free trade has made the success story of BMW Group in the US possible," wrote Kenn Sparks, the company's chief US spokesman. "In our opinion, a further escalation of the trade conflict between the US and China would be harmful for all stakeholders."

The plant started off making cars when it opened more than 23 years ago, at a time when the SUV was starting to catch on in the US.

When it opened in 1994 with an initial investment of US$600 million, the plant had 2,000 workers. It now makes X3, X4, X5 and X6 SUVs there, growing into an economic powerhouse as BMW hired a total of 10,000 people and invested US$8 billion. The factory also supports 40 parts supply companies in the state.

But Kristen Dziczek, a vice-president at industry think tank Center for Automotive Research in Ann Arbor, Michigan, says a trade war with China could force BMW, Mercedes and others to rethink where they make vehicles, and that could cost jobs in the heart of Trump country. Spartanburg County, where the BMW plant is located, voted 63 per cent for Trump in 2016.

BMW would not comment on jobs. Before the tariffs were floated, it had plans to start producing the X3 compact SUV at a Chinese factory. Even so, Sparks says the Spartanburg plant will make more X3s than it does now because of high demand in the US.

Currently, the US is besting China in the auto export business. Companies shipped about 250,000 vehicles from the US to China last year, and China sent about 25,000 to the US. But Dziczek says that is rapidly changing with more production headed to China.

- AP