Daimler sees its 2018-2019 profit dip due to U.S.-China trade tensions

Daimler has warned, any further escalation in the trade row “would be harmful for all stakeholders”.

German luxury carmaker Daimler cut its 2018 profit forecast citing growing signs of import tariff wars between the United Statea and China as well as stricter pollution targets. Both concerns have sparked fears of a wave of earnings downgrade in the automotive industry.

According to Daimler, imposition of trade tariffs by China on its car exports would hurt sales of its Mercedes-Benz cars resulting in mariginally lower earnings before interest and taxes (EBIT) in 2018-2019.

Previously it had foercast a slight increase in its 2018 EBIT

“We do not believe Daimler will be the only OEM (original equipment manufacturer) to reduce guidance. Other OEMs are also exposed to similar trends that Daimler cites in various degrees,” said analysts from Morgan Stanley.

They went on to add, the export of BMW’s SUV from the U.S. is likely to suffer a similar fate as that of Daimler. Furthermore, stricter vehicle certification tests will hit all European manufacturers in the second half of this year.

With the news reaching the market, on Thursday, Daimler’s shares dropped by 3.8% in pre-market trading, while shares of Volkswagen and BMW were down by 1.3% and 2.7%, respectively.

Daimler’s revised forecast comes in the wake of U.S. President Donald Trump proposing to slap on additional tariffs on imported vehicles citing trade imbalances on many products which threaten U.S. national security.

Trumnp has also threatened to impose tariffs on up to $200 billion of Chinese goods. Although China has threatened to mirror the U.S. move, given its trade surplus with the U.S., its likely to be at the losing end in the long run.

Share prices across a wide range of companies have see-sawed in recent weeks with investors trying to assess the risk to the Trump Administration trade policy and its implication on corporate profits.

Although currently, neither the U.S. nor China have acted on their threats of imposing new tariffs, Daimler stated it expects them and once they are applied it would not be able to recover the additional costs from customers.

“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,” said Daimler in a regulatory filing.

According to analysts, the new tariffs could impact BMW, since it is the biggest exporter of vehicles from the United States in terms of value, with its largest factory located in Spartanburg, South Carolina. BMW could potentially face $965 million im additional costs stemming from the new tariffs; Daimler’s exposure to the tariffs are slated to be $765 million, said analysts at Evercore ISI.

In 2017, BMW exported 18% of its productrion to China from its U.S. production facilities. The carmaker has warned a further escalation in the trade row “would be harmful for all stakeholders”.

Midst escalating trade tensions, BMW has quietly stopped exporting its X3 model to China and has relocated production to a plant in Rosslyn, South Africa and another in Shenyang, China.

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