June 21, 2018 / 3:24 PM / 10 months ago

Breakingviews - Trade war tariffs eat Daimler’s homework

The logo of Mercedes-Benz is pictured at the 38th Bangkok International Motor Show in Bangkok, Thailand March 28, 2017. REUTERS/Athit Perawongmetha - RTX32ZZI

LONDON (Reuters Breakingviews) - Gottlieb Daimler and Carl Benz invented the modern car. Now the $75 billion German company built on that legacy seems to have invented the trade-war profit warning. The question for investors is whether Daimler’s stance is a responsible attempt to get out in front of the problem, or a “dog ate my homework” distraction from other shortcomings.

The case for the defence is plausible. Daimler said late on Wednesday that its 2018 operating profit would be slightly below last year’s, compared with previous forecasts for a slight rise. The main causes, it claimed, were prospective 25 percent Chinese tariffs on U.S. car imports and the cost of complying with tougher global fuel-efficiency certification tests.

Assume Daimler’s definition of “slightly” is a 2 percent dip. The difference between previous and current forecasts, using last year’s 14.7 billion euros of operating profit, would be 588 million euros. That would be in the right ballpark: the cost of tariffs on SUV imports from America to China has been estimated at 513 million euros by Evercore ISI analysts, and 975 million euros by Deutsche Bank.

The other way to look at it is that China’s mooted duties, a reaction to U.S. President Donald Trump’s trade aggression, are yet to take effect and could easily be just a negotiating stance. The company didn’t mention that China has also pledged to cut foreign-car duties, which Evercore ISI analysts have estimated would reduce the cost of selling Europe-made vehicles by more than the hit from China’s U.S. tariff. BMW, which also ships SUVs from America to China, reaffirmed existing forecasts on Thursday.

If the impact from trade wars is actually manageable, the profit warning would instead be weighted to the other headaches Daimler mentions. It thinks the company will be hit harder than expected by new fuel-efficiency tests, will have to recall some diesel vans and faces weakening demand for buses in Latin America. Given these are more likely to be Daimler’s fault, loading the blame on Trump sounds more attractive.

Either way, Daimler’s tariff warning makes the political point that trade-wars have costs. That could prove handy for lobbyists since Germany’s big car companies support dropping auto tariffs between Europe and America, according to a report by the Wall Street Journal on Wednesday. If this succeeds, Daimler investors won’t mind its company’s motivation.


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