BREAKINGVIEWS-Car investors only take US tariffs semi-seriously

By Neil Unmack

LONDON, March 27 (Reuters Breakingviews) - European carmaker shares have fallen after U.S. President Donald Trump whacked 25% tariffs on auto imports. Yet declines for the likes of BMW BMWG.DE and Volkswagen VOWG.DE may not be pricing in the worst. The groups can soften the blow and Trump may backtrack - yet U.S. trade imbalances suggest that may not happen soon.

Trump’s 25% auto tariffs are probably about as bad as most observers could have expected, affecting a broad sweep of the 8 million cars the U.S. imports from Asia, Europe, Mexico and Canada. As much as 80% of the cars Volkswagen sells stateside are imported, while for Mercedes-Benz MBGn.DE and BMW that figure is 63% and 52% respectively, according to GlobalData.

While carmaker shares fell on Thursday morning, they are still far from pricing in a worst-case scenario. LSEG data admittedly show that the big European groups trade on a depressed average forward earnings multiple of between 4 times and 6 times. But analysts at Bernstein reckon in a worst-case scenario the move could knock 26% off Mercedes-Benz and BMW’s operating profit this year, while for Volkswagen the hit would be 29%. The loss to earnings would be even greater, of more than 35%, according to Breakingviews calculations using Bernstein and LSEG estimates. So far, the three carmakers are down at most 5% since the peak of this week, or just over 10% since this month’s high.

There are logical reasons why the worst may yet not materialise. For one, carmakers have options. They can whack up prices instead of taking the hit. And they can shift more production to the U.S. and revive idle stateside capacity. Yet neither option is risk-free: higher prices may dent demand for cars, suppressing volumes. Reconfiguring production lines takes time, and is expensive – especially if a future administration reverses the tariffs.

The tariffs may also not be quite as bad as they first appear. It’s still not clear, for example, how the shipping of parts from Mexico and Canada will ultimately be affected, or whether carmaker exports from the United States could offset tariffs on imports. Even the 25% rate might be adjusted during talks over “reciprocal” tariffs, given the EU only applies a 10% rate. Trump himself may backtrack and later on cancel them once he sees car prices soaring, pushing up inflation and interest rates.

All the above is possible, yet it would be a mistake to assume Trump’s plans are not serious. Roughly half the cars sold in the United States last year were imported, while at least half of the content of those built stateside also comes from overseas, the U.S. government reckons. There are many better ways the president could have set about addressing this problem, such as staggered tariffs. But his agenda is unlikely to reset soon.

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CONTEXT NEWS

Global auto stocks tumbled and governments from Ottawa to Berlin threatened retaliation on March 27 after U.S. President Donald Trump unveiled a 25% tariff on imported vehicles.

The new levies on cars and light trucks will take effect on April 3, the day after Trump plans to announce reciprocal tariffs aimed at the countries he says are responsible for the bulk of the U.S. trade deficit.

European Commission President Ursula von der Leyen described the move as "bad for businesses, worse for consumers," while Canadian Prime Minister Mark Carney labelled the tariffs a "direct attack" on Canadian workers and said retaliatory measures were being considered.

Volkswagen shares dropped 3.2%. Chrysler parent Stellantis slumped 5.2%, BMW fell 4.2%, Porsche slid 4.6%, car parts maker Continental shed 3.2%, while Volvo Cars slipped 1.3%.

The STOXX 600 autos sector slumped more 3.1%, on track to erase all of its gains so far this year.

Shares of Toyota Motor lost 3.4%, Honda Motor fell 2.8% and Nissan Motor slipped 2.6%. Mazda Motor lost 6.4%.