Trump tariffs blight auto industry

The European car market has just been stagnant. Sales have been very weak since 2018. The prospects are quite bad because the population in Europe is shrinking. Cars last longer so there's not much prospect for overall sales. And also the European consumers do not yet seem to be demanding EVs on the levels that would be needed. In the end, the 15% deal is not a bad thing for car makers because obviously, you know, 15% compared to 27.5%, that's much better. It's been a difficult first half of the year for European car companies. The latest numbers from Stellantis, Mercedes, Porsche and the like paint the same picture. Tariffs have eaten into their profits. Could the new framework trade deal between Washington and Brussels now help? Well, to help us sort it out, we're speaking with Franziska Palmas. She's an economist at Capital Economics and she joins me from London. Franziska, thank you for joining us. Give us the bottom line. How brutal a first half was this for European car companies? Yeah, it was certainly, you know, a difficult first half. We saw disappointing earning reports from them across the board. Obviously, the German car makers particularly hit, but obviously these car companies, you know, they are attributing some of these difficulties to tariffs. But obviously, it was already a pretty difficult environment for car companies before then due to a lot of, you know, deep running issues in the sector that are still also coming through. Let's touch on those in just a moment. Just for our viewers, since April, here's a reminder of what the car companies have been facing. Since April, they faced import tariffs of 27.5 percent and it's definitely had an effect. Mercedes' profit for the first half of the year compared to the prior year was down more than 50 percent. For BMW, it was roughly 30 percent. And Volkswagen saw a roughly 39 percent drop in net profit for the first half compared to last year. As Franziska said, tariffs are, of course, part of this story, not necessarily the full story. Let's start with tariffs, though. Franziska, many of these car makers produce in the U.S., so why are they exposed to tariffs? They are still exposed to tariffs because, of course, yes, they do produce in the U.S., but they also have even more significant operations in Europe. Obviously, not all of what they produce in Europe goes to the U.S., so a lot of what they produce in Europe is actually not exposed to tariffs, but they do export a non-negligible share of production that they have from Europe to the U.S., and obviously that production is hit by tariffs. If we think, for example, about Germany, around 10 percent of the car production that happens in Germany is exported to the U.S., and that's obviously subject to tariffs. It's obviously not that big in the sense that there's a 90 percent that is not going to the U.S., but it's still significant enough to have an effect, and then obviously there's also concerns about the fact that some of these car companies also export to the U.S. from other locations that are outside the U.S., like from Mexico, and there is a risk, obviously, of some of that being hit by tariffs as well, even though, for now, most of that is included in the exception that there are around tariffs for Mexico. How important is the U.S. as a market for foreign car makers? Give us some sense. We think of China, obviously, as a very big market, but I would imagine the U.S. has to be one of the largest. Yeah, so there is an interesting point to make about this, is that it's perhaps not as important as you might think, considering the importance of the U.S. in the global economy. So, as I was saying, if you think that 10 percent of the cars produced in Germany go to the U.S., that's obviously a significant amount, but it's not the majority share, right? The majority share of the cars produced in Germany are sold in Europe, and even if we look now at the car companies and at their global sales, the U.S. is still accounting for the German car makers for between 10 and 20 percent of their global sales. Europe makes up between 50 and 60. So, to put it into context, it is a relevant market, but other markets, especially the European market and, in part, the Asian market, are much bigger in size than the U.S. market, which is why I was denoting that although the car companies have put this emphasis on the hit from tariffs, which is obviously outside of their control, there is definitely, I think, in those results also problems that are coming from the European and Asian market rather than the U.S. one and the tariffs. Right. I just wanted to ask you about that. But also, I would imagine the U.S. market, that's an economy that's done pretty well compared to Asia and Europe, correct? So, maybe these car companies have looked a bit more towards the U.S.? I guess, help us understand how it looks in Europe and Asia right now. Yes. So, definitely, for example, the U.S. market, we had seen before all these tariff issues and increasing exports of cars from Europe to the U.S. and the U.S. market had a bit kind of like helped to cushion the blow, for example, for the decrease in demand that was coming from China. And probably, yes, in terms of growth prospects for the car makers, the U.S. market maybe looked like a more promising area where there might be still rising consumer demand for cars as opposed to Europe. So, to say a bit more about the problems that they're facing in Europe and in Asia, the European car market has just been stagnant for now a long time. You know, sales have been very weak since 2018 and the prospects are quite bad because the population in Europe is shrinking. Cars last longer. So, you know, there's not much prospect for overall sales and consumption of automobiles in Europe to grow. And to add to that, the problems with the Asian markets are mainly connected to both the Chinese economy slowing and the fact that now Chinese firms produce themselves very good cars, especially EVs that are so the European producer are losing a lot of market share in the Chinese market. And that has obviously been hitting the results. So the Chinese market may look not as great as it once did. The European market, as you said, has been struggling since even before the pandemic. The U.S. market looks more positive. It bounced back from the pandemic in a better way. We've seen better economic growth. You had a 27.5 percent tariff for a while. You've taken a big hit. Now there's this kind of framework trade deal. It looks like 15 percent instead of 27.5 percent. There's still questions, of course. But if you're a car company and you're looking at that, what are you thinking? What does it look like? Is this good news? Is this bad news? Yes. So, I mean, I think overall, given what they might, you know, what in this situation they could get in the end, the 15 percent deal is not a bad thing for car makers, because obviously, you know, 15 percent compared to 27 and a half. That's much better. You know, it's more than 10 percent less tariff rate. So I think overall, and it was clear because Trump was, you know, even in his rhetoric, particularly targeting, especially, you know, the German car sector and sounding very disappointed about the fact that the U.S. was, for example, importing so many cars from Germany that, you know, I don't think anyone was hoping for a tariff of less than 10 percent. Maybe there was some hope for a quota. But, you know, it was clear that the previous status quo of a two and a half percent tariff was that was just not achievable. So given the context, I think car makers will be fairly satisfied with the 15 percent rate and at least this gives them somewhat clarity. Obviously, you know, it's still much worse than the pre-Trump status quo, which was a two and a half percent tariff. There is some things, though, that the car companies themselves would probably do to mitigate the hit from the tariffs. And one of those things is obviously increasing their production in the U.S. Although, for example, the German car makers have significant production facilities in the U.S. Utilization of car plants in the U.S. capacity utilization is fairly low. So there is probably scope for the car makers to increase their production in the in the U.S. and reduce the numbers of cars they export from Europe to the U.S. and mitigate in that way the effect of tariffs as well. That's a big problem politically in Europe. Most likely, if that happens, it could be in theory. There have been fears in Germany, especially about deindustrialization, the fact that manufacturing jobs in many sectors are going back. And this, as you said, incentivizes production in the U.S. What what steps do you expect Germany, Brussels to take when it comes to incentivizing production in Europe or to to mitigating the effect of these tariffs? Is there anything they can do? Is there anything the industry wants them to do and says this needs to happen now? Yes. So obviously, the German government has already been trying to help out industry a bit. They've announced some plans to, for example, cut corporation tax, also some cuts to to energy taxes, although that might not be, you know, that that is more for more energy intensive industries. It might not help out the car industry that much. But clearly, the German government has been starting to do something to to help out the industrial sector a bit. The other thing, obviously, that the car industry has asked for is a loosening of, you know, rules connected to to emissions. And, you know, this this complete phase out of the internal combustion engine in Europe that is planned for 2035. And that is creating quite a bit of problems for the German carmakers that don't seem to be quite on schedule for that. It's possible, you know, that we'll see there some relaxation of that in order to to try to help out industry. And, yes, some other attempts to, you know, reduce taxes a bit, maybe some subsidies and maybe some purchase subsidies as well. The German government has said that it will reintroduce EV purchase subsidies. So this sort of policies in the grand scheme of things, though, given the clear, you know, the weakness of demand in Europe and in Asia and given, you know, the reasons are very structural, right, like shrinking population, big competition from Chinese producers. They can the governments can only go so far with some subsidies on some tax cuts here and there. I think there's not there's not going to be enough basically to halt a reduction in the production of automobiles in Europe and in Germany specifically. I think we'll see more declines there. The European carmakers say that they're committed to electrifying their fleets just like they were before, that there's already a lot of investments made into that and investments coming into electrification. When so much emphasis is on the U.S. market and it's clearly diverging in terms of electrification under Trump, there's less of an interest in electrification and incentives in many ways against it. What kind of problem does that pose for European carmakers who are trying to electrify on the one hand on this continent where they've made a lot of promises and where there's a framework for a green deal? And then on the U.S., they want to serve that market. Could, in other words, the transition to electric be made much more difficult here in Europe because of what's going on in the U.S.? Yes, I think in part probably yes. Then it's also true that maybe, you know, car producers produce different models in different places. So they might start to produce more EVs in Europe and more cars to serve the U.S. market in the U.S. I think it's not just, you know, in the developments in the U.S. that make this transition to EV difficulties. I think the problem is also in Europe, where on the one hand, you have these rules that, you know, dictate that the carmakers will only have, can only sell EVs basically from 2035. But on the other hand, so they've been trying to, you know, meet that deadline. And the German carmakers, for example, have already converted a pretty significant share of their production to EVs, I think around one third. But their production, they're not as efficient in the production of that technology. It's much more expensive for them. Their margins are lower. And also the European consumers do not yet seem to be demanding EVs on the levels that would be needed, you know, first to reach their goal and also to make it, you know, profitable for their carmakers to make this conversion in their production. Partly because, you know, the infrastructure, the charging infrastructure is not yet, you know, as good for to incentivize even more switching from consumers to internal combustion to EVs. And partly because the EVs are still so much more expensive than the internal combustion engine. So there is, even leaving aside, you know, I don't think that the U.S. side that is really creating the problem is more an internal European issue that, you know, that the rules at the switching in the production hasn't matched with demand, increased demand for EVs and that EV production is still much more expensive. All right. That's Francisca Palmas with Capital Economics. Francisca, thank you so much. Thank you.