Trump/German cars: taking the Fifth

Donald Trump renewed his attack on EU car imports in the wake of a fractious G7 summit. An earlier threat to stop Mercedes saloons rolling down Fifth Avenue lacked punch. Gridlock already leaves many smart rides stationary there. A 25 per cent tariff would be felt more painfully by big German carmakers.

BMW has the highest export exposure to the US. It faces the biggest hit to 2018 earnings before interest and tax. This would exceed 12 per cent, estimates Evercore ISI. That is equivalent to €1.3bn off consensus forecasts, S&P Global data suggests. Daimler, the owner of Mercedes, follows at about 11 per cent of ebit and VW at 8 per cent.

Hits that hefty depend on carmakers absorbing all the losses on US imports to maintain market share. The cheaper alternative is to quit the US market. That would trim BMW’s earnings per share by about 7 per cent, with the impact on Daimler around half that, says Barclays.

In the messier real world, German car groups would likely absorb some losses while reducing rather than stopping exports. They could also increase production from US plants.

This might please Mr Trump, but not shareholders. Factories specialise in producing particular models because it is efficient. Car company margins contain no cushioning for each plant to build a whole range.

Moreover, such shifts take years. Mr Trump can reverse out of a policy position faster than a New York cabbie dodging a trip to New Jersey. That leaves the outlook as gloomy as valuations.

German auto groups trade at 6 to 7.5 times forward earnings. A discount to foreign peers reflects governance worries and emissions woes. The latter have weighed heaviest on Daimler and VW lately. A 3 per cent drop in BMW shares over a fortnight implies how much tariff risk is priced in so far for all three.

Hitting cars with a 25 per cent levy would kick back against the EU’s anachronistic 10 per cent charge on US vehicles. Europeans have little appetite for US cars these days. The EU could comfortably equalise with the US at 2.5 per cent.

Optimists believe this would satisfy Mr Trump, ending the trade dispute. But his motives are populist and personal, not economically rational. German car stocks will probably slip further.

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Trump/German cars: taking the Fifth

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