RPT-Fitch: No Immediate Threat to European Carmakers' Ratings from Possible China Tariff

Fri Jun 14, 2013 5:36am EDT

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June 14 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings says that sales and earnings of some European auto manufacturers including BMW , Daimler AG ('A-'/Stable) and Volkswagen AG's ('A-'/Positive) Audi could be impacted by the reported trade dispute between the EU and China and potential import tariff on premium vehicles. Other European groups have more limited sales in China and, besides, should not be affected by this measure in light of their absence from the premium market.

However, we do not anticipate any immediate impact on ratings from this event if it were to materialise. Daimler and Volkswagen have sufficient headroom in their current ratings to accommodate a temporary and mild erosion of their profitability. Nonetheless, a long-lasting and onerous additional duty could have a heavier impact on profitability and in turn, on ratings.

China represents a material and critical source of earnings for BMW, Daimler and Audi. Any decline of sales would have an impact on their profitability and cash generation, as imported cars generate cash not trapped at the JV in China contrary to sales of vehicles produced locally with a Chinese partner. Import tariffs from China on US-built BMW X5 and Mercedes M-class had already hit these groups in 2011.

An extra import duty would make German high-end cars even more expensive and would likely deter some customers or make them choose a smaller engine or version, for which profitability is lower. In addition, the majority of BMW's and Daimler's imported cars include their high-end and most profitable vehicles such as the 7-series and S-class. Overall, about half of BMW's and Daimler's cars sold in China are imported. The rest of Volkswagen's brands' sales could also be affected, although to a much lesser extent.

However, and depending on the final tariff rate if it were confirmed, we believe that customers of the most expensive cars may not be materially affected by an additional tax. Besides, such customers have no real alternative option in the local market to purchase a premium car.

Several press reports in the past few days have commented about talks in China to impose import duties on premium European cars following complaints of "dumping" for cars with more than 2.0 litres engines sold in China.

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