In the years before he became President of the United States, Donald Trump owned luxury German cars. Now, pricey European convertibles are among the vehicles that could become rare on American roads if Trump's proposal to slap tariffs on imported cars takes effect.
On Friday, Trump threatened to impose a 20 percent import tariff on all European Union-assembled vehicles, a move that could upend the industry's current business model for selling cars in the United States.
"The tariffs, if they materialise, would call into question the business case for many niche models we currently sell in the United States," a senior executive at one carmaker told Reuters on Friday. "Convertibles are a particular headache. With Brexit and US tariffs, this market could shrink further."
The executive said convertibles may not disappear if car makers can forge alliances to share production costs, or design vehicles that are less expensive to build alongside high-volume models.
Because of high pollution and scorching sunshine, convertibles are not selling in Asia, leaving the US, Britain and Germany as the largest potential growth markets. Potential tariffs between the EU and Britain after Brexit and yet more tariffs between Europe and the US will shrink the market further, auto executives fear.
German automakers BMW AG , Daimler AG and Volkswagen AG operate assembly plants in the southeastern United States. Those plants concentrate on building high-volume models, mainly SUVs and crossovers and some sedans. But they lack the flexibility to quickly and inexpensively shift production from one model to another in response to rapidly shifting tariff threats, industry experts said.
"The tariff discussion highlights why this flexibility is necessary," said Ron Harbour, a manufacturing consultant with Oliver Wyman. "Those that don't have it will suffer."
A tariff of up to 25 percent would destroy the business case for foreign carmakers to export models such as the $88,200 Mercedes SL roadster or Audi S5 Cabriolet — and deliver a 4.5-billion euro hit for Germany's premium manufacturers, analysts at Evercore ISI said.
Convertible sales already are dwindling in the US, according to figures compiled by LMC Automotive. Sales fell from 177,000 in 2012 to 127,000 in 2017, and are expected to drop further to 113,000 by 2019, even without a tariff increase.
Mercedes is expected to sell about 20,000 convertibles this year in the US and BMW fewer than 16,000, LMC projected. "We expect convertible sales would be hit quite hard" by higher import tariffs, said LMC Senior vice-president Jeff Schuster.
German automakers face broader threats from Trump's shift away from decades of US policy supporting open trade. A US trade war with China could hit exports of US-built utility vehicles made by BMW and Mercedes, said Kristin Dziczek, vice-president at the Center for Automotive Research.
In addition, the two German automakers must contend with proposed tariff increases on imported parts and steel, which could boost the cost of their US-built vehicles.
BMW's plant in Spartanburg, South Carolina, builds X-series sport utility vehicles while the Mercedes plant near Tuscaloosa, Alabama, builds GLE and GLS utility vehicles and the C-Class sedan.
BMW said it is "evaluating the effects" of the proposed tariffs on its operations. A BMW spokesman said the "continuous addition of new models" to its US factory "speaks to the capabilities and flexibility of the plant".
In a statement, Daimler said it continues to monitor the tariff negotiations, adding, "We believe in the benefits of free trade and competition."
If a manufacturer wants to introduce a new model on an existing production line, "The assembly sequence has to be the same or it can't be done without spending a lot of money and time," said a US manufacturing consultant, who asked not to be named. "Nobody in this business can easily take a car line and move it somewhere else. You have to completely redo your logistics infrastructure and your supply base," said the consultant.
These factors make it unlikely that either BMW or Mercedes would relocate production of their convertibles, or other low-volume niche models, from overseas to the United States.
Even before the current trade dispute, convertible sales were spiralling down in the US, said Sam Fiorani, vice-president at AutoForecast Solutions, a vehicle market forecasting company.
Retooling US plants and reworking supply chains to make a tiny number of convertibles would be cost-prohibitive, said Fiorani. Higher tariffs "would virtually eliminate" US demand, he said.
Current US import tariff rates on cars are 2.5 percent and on trucks are 25 percent. Some US dealers carrying imported brands appeared sanguine about the potential impact on their business of new tariffs.
"We've had some conversations (about tariffs), but we're not running for cover yet," said John Cueter, vice-president at Bergstrom Automotive in Madison, Wisconsin, which carries several premium European brands.
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Updated Date: Jun 23, 2018 22:29:57 IST