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Geneva/Berlin: Automakers are bracing for fallout from potential trade wars in Europe and North America by reining in costs, putting investments on hold and making cars with curb appeal—whatever the price.
“We are an export company and, at the end of the day, we need free and fair trade,” Jaguar Land Rover (JLR) chief executive officer (CEO) Ralf Speth said in an interview at the Geneva Motor Show.“We cannot influence political decisions. We have to make the company stronger through better products.”
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Speth and fellow automotive executives gathered Tuesday in Geneva are grappling with how best to confront political headwinds against free trade in regions where they previously had little cause for concern. US President Donald Trump’s administration is picking fights over what it views as unfair trade practices in Europe, the European Union (EU) is preparing for the exit of the UK from the bloc and the US is looking at renegotiating parts of the North American Free Trade Agreement (Nafta).
Suppliers are also caught in the cross-hairs. Canadian auto-parts supplier Magna International Inc. said last month that “protectionist sentiments” such as Trump’s proposed border tax could hurt operations and profitability. Magna has about 20,000 employees in Mexico.
“Our investment pipeline depends on what carmakers in the region do,” Magna CEO Don Walker said in an interview in Geneva. “I would expect major investments by the auto companies to be on hold while this uncertainty lasts.”’
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Automakers are closely watching the exchanges over trade between the US and Germany, Europe’s largest economy. While Germany argues that the euro’s value is out of its control because the European Central Bank sets monetary policy across the 19-member currency bloc, the US claims a “grossly undervalued” euro gives Germany an unfair edge.
“This is the problem with Germany,” Peter Navarro, head of Trump’s National Trade Council, said Monday at an event in Washington. “It is able basically to use the argument that they’re in the euro zone—therefore they can’t have any kind of discussions with the US about reducing their almost $70 billion trade deficit.”
Germany ran a global current account surplus—the balance of goods, services and capital transfers—of about $310 billion last year, according to estimates by the Center for Economic Studies, a research group in Munich. The US is the biggest importer of German goods, buying some $125 billion worth in 2015. And Germany is the No. 4 foreign market for US companies, which in 2015 exported $50 billion in products to the country.
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German Chancellor Angela Merkel plans to emphasize the mutual benefits of free trade between the two countries when she meets with Trump in Washington next week.
“The Americans also have benefited from German exports—think about the quality of German cars or machines,” Juergen Hardt, Merkel’s coordinator for transatlantic affairs, said in an interview. “If the Trump government wants to reindustrialize the US, it needs Germany.”
BMW AG is a prime example of how difficult it will be to renegotiate existing trade pacts without creating unintended consequences. The German automaker’s largest factory is in the US, where BMW and its suppliers employ 70,000 people. The manufacturer has invested in the South Carolina plant under the premise that trade deals allow it to profitably export from the location. Currently, 70% of the plant’s vehicles are sold outside the US.
“The US directly benefits from free trade, as we export in large volumes,” BMW CEO Harald Krueger told reporters Tuesday in Geneva. “We’re clearly a strong supporter of free trade, and not protectionism. Protectionism would affect parts of the value chain in the US”
In Europe, car manufacturers are also left trying to decipher how the UK’s exit from the EU will impact their manufacturing operations and sales in the region. Prime Minister Theresa May plans to trigger legislation this month to begin formal negotiations for the split.
“Brexit is a huge impact,” Jim Farley, head of Ford Motor Co.’s European operations, said Tuesday, adding that the weakening of the pound alone has added a $600 million headwind for the American automaker in Europe. “We made tremendous progress last year on costs, and it just means we’ll have to do it again this year.” Bloomberg