If you build it, will Tariffs come? BMW in the World of Trump

President Trump has threatened manufacturers with a 35% import tariff if they build factories abroad. How does BMW convince the President and other politicians that protectionist trade policies hurt American workers?

Trump Speaks Out 

“The Germans are bad, very bad.”  President Donald Trump used these words to describe his frustration with the German trade surplus with the U.S. and more specifically, with the high number of cars German automakers were selling in the States [1].  Trump then narrowed his aim at the German auto manufacturer BMW saying, “I would tell BMW that if you are building a factory in Mexico and plan to sell cars to the USA, without a 35 percent tax, then you can forget that [2].”  Under the specter of this tariff threat, BMW shares closed down 1.5 percent and many observers questioned whether they would continue with plans for their Mexican plant and whether they would lower their sales goals for cars sold in the U.S.  If BMW did continue to build the plant, analysts estimated that up to 70% of the automobiles produced in Mexico would be sold to North American consumers.  The plant in San Luis Potosi would produce 150,000 cars annually and represent a total investment of $1 billion by BMW.  It would be the company’s second production facility in North America, in addition to the one in Spartanburg, SC [3].  A 35% tariff on cars exported from the new factory to the U.S. would severely impact marginal profit on each unit and jeopardize the entire projected value of the plant.

BMW’s Response

In response to Trump’s threat, BMW executive Peter Schwarzenbauer affirmed the company’s plans to build the plant in Mexico and said, “Trump’s comments aren’t really a surprise” [4].  The company also reminded the President that its largest manufacturing site was located in the U.S. (in Spartanburg, SC) and it planned to increase annual capacity to 450,000 cars at the South Carolina plant and invest another $1 billion in that site.  BMW had already invested $8 billion into the plant and Spartanburg had become the largest exporter of cars by value from the U.S.  Instead of destroying jobs and displacing American workers, BMW had actually created 9,000 employment opportunities in South Carolina.  The Governor of the state, a Trump supporter, commented on the company’s impact there: “The presence of this company (BMW) changed everything in the trajectory of our state” [5].

Despite BMW’s promise to increase investment in the South Carolina factory, it also developed a “Doomsday Scenario” plan to decrease its reliance on the Spartanburg plant and minimize its exposure to the risk inherent in Trump’s protectionist trade proposals.  Instead of only producing the X3 model in South Carolina, the company would revamp factories in South Africa and China to produce X3’s there as well.  Oliver Zipse, a BMW board member, summed up the new strategy: “We will build the X3 not only in Spartanburg, we will split it into South Africa and then to China, so we will have some flexibility to produce cars somewhere else.  If something happens at the political level – which we don’t know yet – we are able to have a flexible response” [6].  Especially in a political climate as unpredictable as the one today, it is essential that companies like BMW have the flexibility to adjust production capabilities from one part of the world to another.

BMW’s Road Ahead

Given the aggregate economic benefits of building a new manufacturing plant in Mexico, BMW can justify their decision to go forward with the plant even when other auto manufacturers, like Ford, have bended to political pressure and scrapped factory plans in Mexico.  Mexico has an extensive list of trade agreements with other nations and has developed a strong network of suppliers for auto manufacturers [7].  Additionally, BMW struck a deal with Mexico under which the company would not be required to pay state and local taxes for 10 years, and the Mexican government has agreed to make significant investment contributions to the new plant.  BMW should explain to American politicians how Mexican governmental policies have encouraged investment and job creation, whereas protectionist and isolationist trade policies only disincentivize companies from increasing manufacturing production in those countries.  Senator Lindsey Graham, a Republican Senator from South Carolina, knows firsthand how these restrictionist policies affect everyday American workers: “Negotiate a trade agreement with Europe, modernize NAFTA, don´t tear it up.  We´re going in the wrong direction. We need more trade agreements, not less” [6].  In a world in which the political winds are blowing against Senator Graham and with President Trump, how do companies convince citizens that free trade actually benefits manufacturing workers like those in Spartanburg?

 

 

(Word Count: 749)

 

 

References:

 

[1] Muller, Peter.  “Die Deutschen sind böse, sehr böse.”  Spiegel Online, (May 2017).  http://www.spiegel.de/politik/ausland/donald-trump-bei-der-eu-die-deutschen-sind-boese-sehr-boese-a-1149282.html

 

[2] Taylor, Edward; Rinke, Andreas.  “Trump threatens German carmakers with 35 percent U.S. import tariff.” Reuters, (Jan. 2017). https://www.reuters.com/article/us-usa-trump-germany-autos/trump-threatens-german-carmakers-with-35-percent-u-s-import-tariff-idUSKBN1500VJ

 

[3] Kurylko, Diana.  “BMW’s Mexico Plant will have wide range.”  Automotive News, (Jun. 2016).  http://www.autonews.com/article/20160620/OEM01/160619876/bmws-mexico-plant-will-have-wide-range

 

[4] Behrmann, Elisabeth; Rauwald, Christoph.  “German Automakers push back Trump’s warning over Mexican Plants.”  Bloomberg, (Jan. 2017).  https://www.bloomberg.com/news/articles/2017-01-16/bmw-pushes-back-after-trump-threatens-tariffs-on-its-mexico-cars

 

[5] Traugott, Jay.  “Donald Trump owes BMW an apology.”  Car Buzz, (Jul. 2017).  http://www.carbuzz.com/news/2017/7/2/Donald-Trump-Owes-BMW-An-Apology-7739930/

 

[6] Wroughton, Lesley; Schneider, Howard.  “Doomsday Scenario.”  The International News, (Jul. 2017).  https://www.thenews.com.pk/magazine/money-matters/213939-Doomsday-scenario

 

[7] Schmitt, Bertel.  “Blasting BMW, Trump shows scary naivete.”  Forbes, (Jan. 2017).  https://www.forbes.com/sites/bertelschmitt/2017/01/16/blasting-bmw-trump-shows-scary-naivete/2/#7152f708563e

 

 

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8 thoughts on “If you build it, will Tariffs come? BMW in the World of Trump

  1. To your question, I would say that Americans tend to think of their local communities first and then their country second. So, if BMW did close their Spartanburg plant, it would affect people in that town significantly and they would be quite resentful. The rest of America might care for a day but then they would forget about it. The only way you can get them to care is to get them to think about what would happen if their hometown suffered the same fate. The problem with globalization is that it is much harder to prove its efficacy: people notice when a plant closes but they may not notice that the price of goods they buy is less than it otherwise would be because of globalization.

    Another item we need to consider is that these plants are enormous investments. That makes it extremely difficult for the auto manufacturers to walk away from them as they’d be sacrificing a ton of money. It also makes these companies think long and hard about where they want to invest. Even if Trump doesn’t end up instituting a border adjustment tax, his rhetoric alone creates a lot of uncertainty and makes companies rethink their plans.

    Finally, I would add that even with a 35% tariff, it could still make sense to produce in Mexico. Labor costs in Mexico are estimated at $8-$10/hour compared to over $50/hour in the U.S., an enormous difference. (https://www.reuters.com/article/autos-uaw-mexico/corrected-u-s-autoworkers-face-threat-as-car-makers-drawn-to-mexico-idUSL2N0WR1KX20150326)

  2. Great writeup and a spot on example of the threat of protectionist policies to these global entities. It seems like BMW is now adjusting to the real threat of such changes by moving their manufacturing elsewhere, which seems like the opposite effect of what Trump was hoping to encourage.

    Furthermore it is interesting to think about what sort of cost implications this will have for the supply chain of the South Carolina plant itself – if they are sourcing their materials from abroad might an increase in tariffs still lead to an increase price of the cars?

  3. “BMW should explain to American politicians how Mexican governmental policies have encouraged investment and job creation, whereas protectionist and isolationist trade policies only disincentivize companies from increasing manufacturing production in those countries.”

    I really enjoyed this write up – I think many people forget that not only do American companies benefit from outsourcing manufacturing because of low labor costs and access to skilled labor, but also that there is so much to learn and model from how other countries are performing. Additionally, it’s great to see you assessing the importance of flexibility in a business – without knowing what could happen at the political level, it’s great that BMW has factories located in different geographies to ensure they can adapt to whatever comes their way. In many of our cases, we read that often times manufacturers didn’t even have flexibility regarding using a skilled worker in the place of another worker who is unable to make their shift. By having so much flexibility, BMW is setting itself up for operational success.

  4. I tend to follow news on BMW in particular and missed the decision to produce the X3 in multiple locations. It seems like a wise move to incur a slight cost from reduced economies of scale to hedge against a future trade war.

    I agree with others that BMW ought to emphasize and broadcast its investments in the US and the jobs that it has created. It is unfortunate that they would have to waste PR dollars on this if it was not in plan, but it is probably worth an ad and outreach campaign in DC and manufacturing states to raise awareness. It should be their goal for lawmakers to know exactly their factual position even if alternative falsehoods are being yelled at them from protectionist parties.

  5. Great essay!! I think that in addition to the arguments you laid out, BMW is in a good position to combat such isolationist as Trump with regards to manufacturing. BMW supply chain is quite diversified so that any single political movement in one country does not impact the entire supply chain. This built in flexibility gives BMW the ability to have multiple options (doomsday vs change output in the US if that would be agreeable). In addition, I believe that BMW benefits from its belief that Trump’s policies will not necessarily follow him in US policy after he is no longer President. As Trump has continued to use Twitter and say incensing things in the news, any single comment is in the news cycle for a shorter period of time and any single company reference has a lower impact. In some ways, BMW may have benefited from one segment of the market by being targeted by Trump in terms of what customers would be willing to pay in order to support a company that Trump has targeted.

  6. I agree there’s great economic benefit for BMW to continue operation in Mexico. However, if the U.S. government impose a large import tax on BMW, the operation may not be sustainable anymore. I also agree with you that BMW need to have the flexibility to operate factories in different countries. BMW has to consider the cost and efficiency in choosing where to operate though.
    The government should not force the manufacturing companies to create jobs in the U.S. This may only hurt the business and may create only inefficient job positions. The government should give more incentives to the manufacturing companies, like the tax benefits that Mexican government offered to BMW. If operating in the U.S. is truly beneficial for manufacturing companies’ profit, (if there’s lower raw material costs, high yield, etc.) and the facilities can operate efficiently, then companies like BMW will simultaneously focus on operation in the U.S. and create more jobs for American people.

  7. I enjoyed the “Doomsday” comment in this essay as I think it highlights the key consideration in regards to combating isolationism for companies. In a world of free trade agreements and no threats of isolationism, companies would only need to consider cost efficiencies of producing in certain countries versus shipping cost and customer locations. With the isolationist issue today, companies must ensure that they have a back-up plan for each new international plant – not only an ability to switch production to other plants but have other nearby customers and markets to dump cars if tariffs prevent a company from selling into an intended market. What’s interesting about this phenomenon is if tariffs push production and supply to other markets does that result in excess capacity. For example, if all Mexican car plants now sell cars intended for the US in Latin America – increasing supply and capacity in this region.

  8. Great essay! I think the idea is quite similar to the Nissan article written by a fellow classmate, but I believe BMW is both better positioned to succeed and is also taking a better approach to battle isolationism. BMW is a high-end maker, and as such will not be impacted by disruptions to its supply chain (unless they’re huge, but I don’t see evidence that that could be the case in the short term).
    I don’t think BMW should be overly concerned with Trump’s attacks and use it as a basis to decide on whether to build the plant in Mexico or USA. I’m quite surprised by their response; however. I found Ghosn’s diplomacy/lobbying in UK to be a key factor in ensuring Nissan gets the best deal possible, whereas I don’t think BMW is doing a great job shielding itself from the increasingly isolationist US government.
    To answer your question at the end, I agree with Minecraft’s comments about spending money on a PR campaign (however unfortunate). BMW could also increase its CSR spend/engagement in the community, as that proved to be a key driver of acceptance for a previous client of mine who had purchased an ore in Ghana without requiring massive PR investments.

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