Three BMW factories supply its 3-Series sedan for 40 markets. One factory is in Germany. The other two are in Mexico and China — two countries singled out by the Trump White House in its ongoing trade war.

In Mexico’s case, the White House indicated the two countries had signed an agreement to stem the flow of illegal immigration from Mexico to the U.S. This was in exchange for postponing a 10% import tariff slated to go into effect on June 10, 2019.

This is good news for BMW’s Mexico factory. If the U.S. had followed through on 10% tariffs, a 25% escalation wouldn’t have been far behind. The costs for BMW could have spiraled to $12,000 extra per vehicle and even forced the closure of the factory in Mexico.

BMW’s presence in Mexico has escaped the line of fire in the ongoing trade war. However, its fortunes in China may not be so certain.

BMW and Tariffs in China

In 2018, the trade war between Trump and China carried a price tag for BMW in the ballpark of $333 million.

Part of the problem is that the automaker has had to raise prices on two crossover vehicles in the Chinese market — X5 and X6 SUVs — by up to 7%. This is due to China’s retaliatory move in 2018 to cut tariffs on automaker imports on all but U.S.-made vehicles.

The latest round of tariffs, as of July 2019, saw China target U.S.-made cars and other products with additional import duties as high as 40%. The total price tag of Chinese tariffs on goods imported from the U.S. stands at $34 billion.

Can BMW Absorb the Added Costs?

The question for BMW is whether it can absorb the higher costs imposed by tariffs across the global economy. In 2018, BMW and Mercedes-Benz represented 57% of the vehicles manufactured in the U.S. and imported to China. Ford came in second with 20%, and Tesla took third place with 7%. These three automakers have the most to lose in a trade war with China.

John Bozzella, representing Here for America — a trade group which includes BMW, Daimler, VW and other automakers — said the trade war has brought potential long-term harm to the sector. “The tit-for-tat tariffs, absent any meaningful negotiations, are damaging to the American auto industry.”

The economic numbers support this summary. Until August 2018, U.S. exports of goods to China had been on an almost unbroken 11-month uptick. Tariffs and trade tensions disrupted that ongoing growth, at which time several exports to China dropped dramatically or trickled to zero:

• Soybean exports to China are down by 95%.
• U.S. exports of crude oil to China are now at zero.
• Motor vehicle exports to China from the U.S. dropped by 50% after the first round of higher tariffs and then by more than 50% for each of three consecutive months in June, July and August, 2018.

Again, the question is whether BMW can absorb the costs and remain financially solvent even with its exports to critical markets hampered by the trade war.

The company has raised MRSPs on two of its most popular crossover SUV products, the X5 and the X6. This is less an absorption of the higher cost of doing business and more a way of shunting those costs to the consumer. Whether this is a sustainable response is uncertain, especially with the threat of even more tariffs to come.

More Hurt to Come

Sept. 1 and Dec. 15, 2019, will see additional retaliatory measures from China in response to higher tariffs on Chinese goods imported to the U.S. This will further raise the stakes for soybean, crude oil and vehicle exporters.

Other news that signals further difficulties for automakers includes the declaration from the White House that it’s within the president’s purview to order American companies to leave China and “re-shore” in America. This would be the bluntest of blunt instruments when it comes to avoiding the worst outcome for BMW and others.

BMW’s largest assembly plant is located in South Carolina and builds almost half a million cars every year. There are 8,000 workers here, and most of the products they assemble are destined for Canada, the European Union and other markets.

Because it exports more autos than it sells domestically, this factory may be the first to go if BMW finds the financial pinch and ongoing uncertainty of these “trade discussions” unsustainable.

In the meantime, major companies must wait and see what the future holds now that borders seem to hold more sway over our lives and livelihoods than ever before.