The answer might surprise you.
Two of Germany's largest car makers stand to be immediate
beneficiaries of a reduction in trade tension between the U.S. and China.
Currently,
America's automakers export more of their cars to China than it imports from that market,
BMW AG
and Daimler AG lead the way with their American-made cars.
Over the years,
both companies have invested heavily in the U.S. to build factories that supply not only American drivers
but also the export markets,
including China.
In 2017
U.S. manufacturers exported almost 270,000 passenger cars worth $9.5 billion to China,
but only imported 58,000 vehicles worth $1.5 billion from the world's largest car market.
Of the units exported to China by U.S. car manufacturers,
BMW and Daimler accounted for 67% of the total.
Ford was third,
exporting nearly 45,000 cars to customers in China.
While the $8.0 billion trade surplus that the U.S. enjoys with China
in autos is a small portion of its overall trade deficit with the country,
autos are big-ticket items that create high paying jobs.
BMW first came to the U.S. in 1975 when it established BMW North America in Woodcliff Lake, New Jersey.
In 1994,
BMW opened its first full manufacturing facility outside
Germany and its first U.S. production facility in Spartanburg, South Carolina.
Since opening the plant,
BMW has invested over $9 billion in the 1,150-acre,
7 million square-foot campus that now employs more than 10,000 people.
In 2017,
BMW exported over 270,000 X3,
X4,
X5,
and X6 models,
more than 70% of Spartanburg's total production volume of 370,000 units,
making BMW the largest U.S. exporter of vehicles.
In 2017,
BMW also leads the way in auto exports to China,
sending over 100,000 units to Chinese customers from Spartanburg.
The second largest U.S. exporter of passenger cars to China in 2017 was Mercedes Benz USA
("MBUSA")
a unit of Daimler,
which exported over 72,000 Mercedes-Benz GL,
GLE,
GLS,
and R-Class models.
Headquartered in Atlanta, Georgia,
MBUSA
also has a long history in the United States.
The company was formally established in 1965
but began selling Mercedes-Benz vehicles in America as early as 1952.
MBUSA first established its U.S. manufacturing operations in 1995
when it opened a factory in Tuscaloosa County, Alabama.
With production of more than 310,000 vehicles,
the Tuscaloosa facility is now the worldwide production location for the GLE,
GLS and GLE Coupe SUVs,
as well as for the C-Class sedan for North America.
Since its opening,
MBUSA
has invested more than $6 billion in Tuscaloosa
and now employs more than 3,700 and supports over 10,000 jobs at suppliers
and service providers throughout the region.
In April of 2018,
MBUSA announced an additional $1 billion investment in its Alabama plant.
Because the luxury vehicles produced by BMW and MBUSA are big-ticket items,
tariffs are an important consideration as the two companies develop their global supply chain strategies.
Generally,
auto companies prefer to produce their car models in the markets where they are actually sold,
which is why both BMW and Daimler have established assembly plants in China.
In addition to tariffs and being close to the consumer,
however,
plant utilization,
economic factors,
and customer preferences are also important considerations.
For example,
foreign ownership of Chinese assembly operations has been limited to 50% until recently.
While this restriction will go by the wayside in 2022,
international car companies need to take into account the fact that profits
from cars made in a joint venture are shared with their Chinese joint venture partner.
Also,
Chinese customers often prefer,
and will pay a premium,
for products that have the "Made In USA" label,
even though the same product may be available from a Chinese joint venture.
This is particularly the case with luxury automobiles.
When exporting cars to China,
an import duty,
a Value Added Tax
("VAT")
of 16%,
and a Consumption Tax of between 1 and 40%,
depending upon the size of the engine,
are added to the price of the vehicle.
It should be noted that cars made and sold in China are also subject to the VAT and Consumption Tax.
Up until July 1, 2018,
when China reduced the tariff on car imports to 15%,
vehicles imported into China were subject to a 25% import duty.
However,
when President Trump increased the tariff on cars imported from China into the U.S. from 2.5% to 27.5% on July 6,
President Xi of China raised the tariff on car from the U.S. from 15% to 40%.
As a result of the 90-day truce agreed upon by the leaders of world's two largest economies
after their recent meeting in Argentina,
China announced over the weekend that it would reduce the tariffs on cars imported from the U.S. to 15%
during the 90-day period ending March 31, 2019.
BMW and MBUSA reacted immediately to China's announcement.
On Saturday,
BMW announced 4% price cuts for models,
including the X5 sport utility vehicle,
imported from its U.S. plant.
While the trade war between the U.S. and China is creating near term uncertainty with companies and consumers alike,
the long-term impact may be positive if the truce is followed by a more lasting compromise.
To the extent that tariffs on autos sold to China remain at 15%,
and are perhaps reduced even further,
ompanies like BMW and Daimler with global supply chains will be major beneficiaries.
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