US automotive sector experiences a mix of relief and discomfort with the US trade agreement
In a significant blow to the German auto industry, the recently agreed upon tariffs on EU goods, including cars, continue to pose challenges for German automakers such as BMW, Volkswagen, Porsche, and Mercedes-Benz. The 15% tariffs, while a reduction from the previous 27.5%, are still causing substantial export difficulties and profit pressures.
The US, a crucial market for German automakers, accounts for nearly a quarter of their exports, with about 750,000 cars exported last year. The tariffs have pushed up car prices in the US market, with consumers expected to bear about two-thirds of the price hike, and manufacturers absorbing the remaining third – squeezing margins.
The increased costs have led to share price drops and profit compression for these companies. For instance, Volkswagen announced that its first-quarter results had been reduced by around 1.3 billion euros ($1.5 billion) due to tariffs. Similarly, Volvo Cars reported steep second-quarter losses.
The tariffs are also causing disruptions to supply chains and inflating production costs, which reduces profits and erodes competitiveness. In response, companies might need to pursue cost-cutting measures elsewhere to compensate for tariff-related expenses.
The economic impact of these tariffs is not limited to the auto industry. German Chancellor Friedrich Merz forecasted "substantial damage" to Germany's economy, highlighting the macroeconomic significance of the reduced but still elevated tariff level on German exports. Analysts expect the tariffs to reduce EU economic growth, with the deal being labelled as "asymmetric and unbalanced" since the EU faces tariffs while US exports to the EU remain largely tariff-free.
In an effort to alleviate the pressure, Mercedes is seeking help from the national or EU level to remove trade barriers. Meanwhile, Audi has cut its revenue and profit targets for this year but expects them to rise next year. The European auto sector is also lobbying the European Commission to delay the timetable for making the European car market go all-electric and to provide industry stimulus.
Some companies, like Volkswagen, are exploring the possibility of reaching a side deal with the US that would take into account investments the company could make in that country. However, for now, the 15% tariff rate is expected to cost German carmakers "billions each year", according to Hildegard Mueller, head of the national automobile manufacturers' association VDA.
In the face of these challenges, the European Automobile Manufacturers' Association (ACEA) has welcomed the agreement in principle, but noted that the 15% US tariffs on EU goods, including cars, will continue to have a negative impact. As a result, the agreement has forced all automakers to lower their 2025 profit forecasts and look for ways to alleviate the pressure.
Politicians are urged to continue working to eliminate obstacles for free trade, with the spokeswoman for Mercedes stating this need clearly. The situation remains fluid, and the industry will need to adapt and innovate to navigate these challenging times.
- Despite the reduction of tariffs, the challenges posed by the 15% tariffs on EU goods, including cars, in the United States continue to impact lifestyle choices, as consumers face increased car prices, potentially altering their decision-making process when purchasing vehicles.
- In the realm of technology, German automakers are exploring various cost-cutting measures to counteract the tariff-related expenses, possibly investing more in advanced technology and electric vehicle development to maintain their competitiveness in the global market.
