VW and BMW spread the gloom at Frankfurt show

Volkswagen and other carmakers have warned that trade tensions risk dragging the global economy into a recession as the fallout starts to hit consumers.

The gloom of the US and China’s tit-for-tat tariffs cast a shadow over the Frankfurt Motor Show this week, where carmakers were seeking to whip up interest in critical new electric models. The geopolitical volatility adds another layer of uncertainty to an industry in the midst of a radical overhaul as the end of combustion-engine era looms.

“We come now into a situation where this trade war is really influencing the mood of the customers, and it has the chance to really disrupt the world economy,” said Volkswagen CEO Herbert Diess.

“China is basically a healthy market, but because of the trade war, the car market is basically in a recession. So that’s a new situation. That’s scary for us.”

Concerns about global trade have reached nearly 10 times the peaks seen in previous decades and could shave about 0.75 percentage points off world economic growth this year, according to IMF data.

The car industry is particularly exposed because of its global network of assembly plants and parts’ suppliers. Daimler, for instance, makes many of its Mercedes-Benz’s SUVs in Alabama and exports them to China and other markets.

“What will happen in 2020 will very much depend on what happens with the US and China in the coming weeks,” said BMW chief financial officer Nicolas Peter.

The German manufacturer assembles most of its SUVs in South Carolina. BMW also used Frankfurt to communicate that it would reduce output at its Oxford plant by eliminating a work shift should the UK opt for a hard Brexit.

The German carmaker already plans to completely halt production on the October 31 deadline when the UK is still officially scheduled to leave the EU, as well as on November 1, said Mr Peter.

“We’d have to increase prices, and we have to curtail production to react to such a development. The plans are in the drawer,” said Mr Peter on BMW’s contingency plans should the UK drop out of the EU without an agreement.

Carmakers have for over a year warned a no-deal Brexit would mean shifting production out of the UK. Toyota has estimated daily costs running into the millions, and it said last week it would stop production on the day of departure. BMW has set aside €300m to deal with any Brexit-related costs.

“Everyone is affected by the industry downturn, everyone is suffering,” Continental CEO Elmar Degenhart said in Frankfurt.

Europe’s second-largest car supplier plans to finalise a review of its sprawling global manufacturing network by the end of this year and doesn’t rule out factory closures or layoffs as part of sweeping plans.

Outside the car show, other German industry leaders voiced their concerns about trade risks. Siemens CEO Joe Kaeser urged the EU to assert its voice in the trade conflict between the US and China, saying the spectre of a “decoupling” of political and economic systems would risk a global slowdown.

- Bloomberg