Daimler became the first prominent company to cut its profit outlook due to escalating trade tensions between the U.S. and China, claiming Chinese customers will now buy fewer cars after Beijing slaps tariffs on U.S. auto imports.
The manufacturer of Mercedes-Benz cars said late Wednesday its full-year earnings excluding some items will be slightly lower than last year. Many SUVs are built in Alabama and then shipped to China. Those vehicles are now caught up in retaliatory tariffs announced in China in response to President Donald Trump’s levies on $50 billion in Chinese goods.
With the rising prospect of an all-out trade war, few industries will be spared and more companies may have to follow Daimler (ddaif), said Nicholas Smith, a strategist at CLSA Securities in Tokyo. MillerCoors, the maker of Miller Lite and Coors Lite, warned last week that U.S. tariffs on aluminum imports could result in a $40 million hit to its bottom line.
Shares of German carmakers fell on Thursday. Daimler dropped 4.4% at 11:58 a.m. in Frankfurt — its biggest decline since early April. BMW (bmwyy), which exports vehicles to China from its plant in Spartanburg, S.C., slid 3.1%. Volkswagen (vlkay), which has limited China-U.S. trade exposure, slipped 2.8%.
“Taking the cynic’s view, I think there will be a lot of companies needing to cut sales forecast and this will be an incredibly convenient reason to blame it on,” Smith said. “The Europeans will take a hit on this, the Chinese are going to find this very bumpy and it’s in the nature of a trade war that everyone loses.”
Daimler’s competitors were less eager to draw conclusions, and some analysts suggested its warming might be premature. A VW spokesman said the company’s 2018 profit targets remain unchanged. BMW said that while it was monitoring developments, it too stood by its outlook.
The Munich-based company, second to Mercedes among luxury carmakers, last year exported more than 100,000 sport utility vehicles to China from the U.S. While that number will decline this year with BMW moving to produce its X3 SUV in China, it’ll continue to export the high-end X5. It’s exposed to a potential an operating-earnings hit of 100 million euros ($115 million) to 200 million euros, according to analyst Juergen Pieper at Bankhaus Metzler.
The tariffs announced by Trump, and China’s in-kind response, may just be a start in the escalating conflict. On Monday, Trump said he had instructed the U.S. Trade Representative’s office to identify $200 billion in Chinese imports for additional tariffs of 10%. He said the U.S. would impose tariffs on another $200 billion after that if Beijing retaliates. The range of products that could eventually be taxed by Trump is approaching the value of all U.S. imports from China last year — about $505 billion.
On Thursday, a Chinese commerce ministry spokesman reiterated that China is “fully prepared” to respond to any new list of U.S. tariffs on Chinese exports.
The rising tensions threaten to upend a global production system built over decades amid falling trade barriers and the rise of China and other low-cost producers. Trade flows are so complex that large companies will be challenged to quickly adapt to a shifting political climate.
“Remember, for those following from a Trump/global free trade perspective, this is now a German car maker, warning on the profits coming from their Alabama-made SUVs, which are then sold/exported into China –- a complicated situation indeed!!” wrote Evercore ISI analyst Arndt Ellinghorst.
Daimler and BMW are among carmakers most affected by China’s additional tariffs against American-made cars — more so than U.S. auto manufacturers, according to Evercore. Daimler and BMW will ship just over 100,000 vehicles to China from the U.S. this year, Evercore estimated in April — almost $7 billion worth of goods.
“Fewer than expected SUV sales and higher than expected costs — not completely passed on to the customers — must be assumed because of increased import tariffs for U.S. vehicles into the Chinese market,” Daimler said in its statement. The company called this “the decisive factor” in its revised outlook.
Daimler also slashed expectations for a series of other metrics for the year, citing several other factors. The manufacturer now sees operating profit at its vans unit being significantly below last year’s level, compared with a previous guidance for only a slight drop. The company attributed the shortfall to a recent recall of diesel vehicles.
Earnings for the buses division probably will be in line with last year, Daimler said, revising a previous prediction for slight improvement amid declining demand in Latin America.
The profit warnings cap a difficult month for Chief Executive Officer Dieter Zetsche, who was summoned to Berlin several times in recent weeks to explain to the government the existence of alleged defeat devices in some engines. Daimler was ordered earlier this month to recall 774,000 vehicles in Europe, though the company dodged having to pay any fines.
Earlier Wednesday, the Stuttgart, Germany-based company was sued by a shareholder alleging that the carmaker misled investors about the severity of the diesel-emissions scandal that continues to plague the nation’s auto industry. The company said in a statement that it views the lawsuit as unfounded and will defend itself with all legal means.
The diesel scandal and mass recalls have weighed on Daimler and other German carmakers since the fall of 2015, when Volkswagen admitted to mass manipulation of engines. Daimler shares have lost about 15% this year, making them the worst-performing autos stock on Germany’s benchmark DAX index.