Trade war starts to hit businesses with Daimler cutting outlook

[SOUTHFIELD, MICHIGAN] Daimler AG became the most visible global corporation to cut its profit outlook and blame it on escalating trade tensions, saying fewer Chinese customers will buy Mercedes-Benz SUVs because of tariffs Beijing is slapping on autos imported from the US.

Just two months after projecting higher profit, the German luxury-car maker said late Wednesday its full-year earnings excluding some items will be slightly lower than last year. Much of Daimler's more than US$1 billion of C-Class sedans and GLS and GLE crossovers exported from the US last year went to China, and they are now caught up in retaliatory tariffs China announced last week in response to President Donald Trump's levies on US$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 US tariffs on aluminum imports could result in a US$40 million hit to its bottom line.

"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," Mr 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 US$50 billion in tariffs announced by Mr Trump and China's in-kind response may just be a start in the escalating conflict. On Monday, Mr Trump said he had instructed the US Trade Representative's office to identify US$200 billion in Chinese imports for additional tariffs of 10 per cent. He said the US would impose tariffs on another US$200 billion after that if Beijing retaliates. The range of products that could eventually be taxed by Mr Trump is approaching the value of all US imports from China last year - about US$505 billion.

On Thursday, a Chinese commerce ministry spokesman reiterated that China is "fully prepared" to respond to any new list of US 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 US auto manufacturers, according to Evercore ISI. Daimler and BMW will ship just over 100,000 vehicles to China from the US this year, Evercore estimated in April - almost US$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 US 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, Daimler 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 per cent this year, making them the worst-performing autos stock on Germany's benchmark DAX index.

BLOOMBERG