Daimler Becomes First to Predict Profit Hit on Trade War

Daimler AG 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 has slapped tariffs on U.S. auto imports.

The German luxury-car maker said late Wednesday its full-year earnings excluding some items will be slightly lower than last year. Many Daimler C-Class sedans and SUVs are built in Alabama and then are 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, 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 2.9 percent at 9:06 a.m. in Frankfurt. BMW, which also exports vehicles to China from its plant in Spartanburg, South Carolina, declined 2.1 percent. Volkswagen AG, which has limited China-U.S. trade exposure, slipped 1.4 percent.

BMW, the second-biggest luxury carmaker, last year exported more than 100,000 sport utility vehicles to China from its U.S. factory. 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. Last year, it shipped 46,151 of those vehicles. BMW is exposed to an operating-earnings hit of 100 million euros ($115 million) to 200 million euros, according to analyst Juergen Pieper at Bankhaus Metzler.

“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.”

The $50 billion in 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 percent. 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.

Daimler and its German rival BMW AG are among carmakers most affected by China’s additional tariffs against American-made cars—more so than U.S. auto manufacturers, according to Evercore ISI. 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 AG admitted to mass manipulation of engines. Daimler shares have lost about 15 percent this year, making them the worst-performing autos stock on Germany’s benchmark DAX index.