Consequences of the Trump Presidency for Volkswagen Group

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This topic discusses the consequences of Trump presidency on Volkswagen. Trump has vowed to impose a tariff of 10% across the board on all imports from Europe and a 100% tariff on vehicles made in Mexico. According to Goldman Sachs, a 10% tariff will reduce EU’s GDP by 1% and cause a 6% to 7% headwind on corporate earnings. North America is one of Volkswagen’s most important regions. In 2023, Volkswagen generated €67.9 billion from North America (page 22, 2023 annual report). As such, Volkswagen is one of Europe’s automakers that could be heavily impacted by the Trump tariffs.

Real-time reporting and first parts of this discussion on Telegram.

Message Archive

Moritz 06.11.2024 - around 13:00
Aron Do you think Volkswagen is down as much today due to Trump or Audis updated guidance? Do we have analyst/commentator opinions how large the impact of a trump presidency on Volkswagen or other German car manufacturers might be? I am very interested to increase the position at current price levels.

Aron
I don’t think it’s Audi since other German automakers’ shares are also down. It’s more likely to be due to Trump presidency as Bloomberg writes

Moritz
Any first thoughts how large the impact of a trump presidency could be for Volkswagen?

Aron Bett
Goldman Sachs estimates that if Trump imposes 10% tariff on EU imports, it will erase around 1% of the region’s GDP. That will reduce corporate earnings by 6% to 7%. Around €207.6bn worth of machinery and vehicles are imported to U.S and Europe. In 2022, Volkswagen’s North America revenue was €60 billion. So even if we assume a 4% headwind on 2025 earnings estimate, that’s around 500 million headwind.

Moritz
Is tariffs on cars also be going to be 10% or something else? Which % of the 60billion in 2022 U.S revenue for Volkswagen have been important vs produced in the U.S? Why assume a 4% headwind? How do you arrive at only 500million?

Aron
The 10% is across the board. Volkswagen doesn’t specify how much of the 60 billion comes from units produced in U.S. I assumed 4% because some units are produced in U.S. For instance in 2023 , its main plant in U.S, Chatanooga plant produced 175,000 units (18% of units sold in North America). But yeah, the headwind could be higher given that he’s also proposing 100% tariff on vehicles made in Mexico. Volkswagen’s Puebla plant in Mexico produced 350,000 units in 2023 (around 35% of units sold in North America). The 500 million (should be 587 million) comes from 4% of 14.7 billion earnings estimate for 2025.

Aron

N/B: That’s my guestimate based on those assumptions

Moritz
I think this topic is a large one. Can you open a new topic for it in the Forum and post it here? Are you absolutely sure that we cannot guestimate better which % of Volkswagen revenues could be affected by tariffs? I think depending on our findings the impact could be way more significant (?) 100% tariffs would mean that cars produced in Mexico could not be sold anymore in the U.S. market but probably need to exported to other regions. This means that Volkswagen would either loose market share in the U.S. and sell fewer cars or need to import even more cars from other regions (e.g. europe). 10% tariffs would still be very significant given that Volkswagen groups aggregate profit margin is not even that high. For example if 40 billion would be subject to a 10% tax and Volkswagen fails to raise prices but is paying the tariff themselves that would mean that it has additional costs of 4billion. This would make some of the products unprofitable so that it would probably choose to sell less products in the U.S. The additional costs would also directly affect earnings

Aron

I haven’t found a better way to guestimate. But in 2019, Trump was proposing to introduce a 25% tariff on car imports. Former VW CEO Diess agreed with Evercore’s projections that such an action will cost Volkswagen €2.5bn a year — or 13 per cent of its expected earnings in a worst case scenario.

I think I will less some costs such as distribution costs in your estimates since that’s incurred after the vehicle is already in the country.

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@Aron I am just copy pasting our last two messages in this topic so that it is easier to have a reference for the conversation.

Moritz

I think this topic is a large one. Can you open a new topic for it in the Forum and post it here? Are you absolutely sure that we cannot guestimate better which % of Volkswagen revenues could be affected by tariffs? I think depending on our findings the impact could be way more significant (?) 100% tariffs would mean that cars produced in Mexico could not be sold anymore in the U.S. market but probably need to exported to other regions. This means that Volkswagen would either loose market share in the U.S. and sell fewer cars or need to import even more cars from other regions (e.g. europe). 10% tariffs would still be very significant given that Volkswagen groups aggregate profit margin is not even that high. For example if 40 billion would be subject to a 10% tax and Volkswagen fails to raise prices but is paying the tariff themselves that would mean that it has additional costs of 4billion. This would make some of the products unprofitable so that it would probably choose to sell less products in the U.S. The additional costs would also directly affect earnings

Aron

I haven’t found a better way to guestimate. But in 2019, Trump was proposing to introduce a 25% tariff on car imports. Former VW CEO Diess agreed with Evercore’s projections that such an action will cost Volkswagen €2.5bn a year — or 13 per cent of its expected earnings in a worst case scenario.

I think I will less some costs such as distribution costs in your estimates since that’s incurred after the vehicle is already in the country.

This estimate is interesting but still does not help me to get a good picture of the situation given that back in the day the proposed 25% tariff only affected European imports and not Mexican imports. So we would need to try to find good analyst opinions how large the impact for Volkswagen could be. This is one of the highest priorities right now as I think current Volkswagen stock prices are attractive but I don’t have a good estimate of what is going to happen.

In addition it would always be great for me to know what you already checked if you say you didn’t find a better way to guestimate (like annual reports, chatgpt etc.) This would help me to think if I have any additional ideas how we could look for information.

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Yes, I was just confirming whether the 25% also impacted Mexico. Apparently it didn’t.

I have checked for analysts/experts estimates but I haven’t found any (other than the one from Goldman Sachs)

I tried to estimate the impact here using the proportion of production and deliveries and I arrive at an headwind of €3.63 billion.

I will keep checking for more insights.

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I think the possibility of Volkswagen offsetting the tariff through price increase in U.S. is minimal given that its German rivals, Mercedes-Benz and BMW have a huge production capacity in the region. In 2023, two-thirds of BMW’s U.S. sales were produced domestically. Similarly, Mercedes produces around 346,600 vehicles in U.S. versus sales of 298,000 in 2023.

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Those calculations are what I have been looking for.
Assuming additional logistics costs for shipping from Mexico, the total cost to Volkswagen in your scenario could be in the €4 billion range.
Obvs. There is a range of scenarios ranging from no tariffs to partial tariffs to companies like Volkswagen making deals (for example, building new plants in the United States to avoid tariffs for a number of years). Do you think there is any way with moderate time expenditure to get a take / very rough estimates of probabilities of different scenarios to calculate an average similarly like you did it in the Dt. Wohnen DPLTA case? Both the average and learning what you think are most likely scenarios would be interesting to me.

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I don’t think Volkswagen will ship models from Mexico to Europe and then USA. I think the mostly likely and legal scenario is producing in Europe for the USA market. For instance, the Taos produced in Argentina for the South America region could be diverted to USA while that produced at Puebla plant in Mexico is taken to South America. I also expect the no tariff on distribution costs to largely offset the shipping costs difference. I think the other main headwind will come from adapting the plants in Europe to produce models specifically sold in USA such as Jetta which is currently made in Mexico.

I have considered various scenarios here such as possibility of automakers to agree with the US government not to pay tariff as they build plants in the country, possibility of the EU to come up with measures to appease Trump, possibility of offsetting the tariff headwind through price increases and possibility of a reduced tariff rate. I arrive at an headwind of $2.91 billion under these scenarios.

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I=3
Buy, €112: Analyst Romain Gourvil of Berenberg said the risk of import tariffs on U.S imports from Europe is growing. He added that German automakers will be hit the hardest.

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I=2
Trump’s transition team plans to kill the $7,500 BEV subsidy

  • Trump’s transition team plans to kill the $7,500 consumer tax credit for electric vehicles (EVs) as part of the new administration’s broader tax-reform legislation, Reuters reported citing two people familiar with the matter.
  • Tesla has been the main beneficiary of the subsidy but Elon Musk wrote on X yesterday that he is in support of killing them.
  • Musk said in July that killing the subsidy will benefit Tesla in the long-term since it will lower competition in the U.S. market.
  • Volkswagen’s ID.4 has been eligible for the full $7,500 subsidy since it’s manufactured at Chattanooga Plant plant in Tennessee.
  • Around 38,000 units of ID.4 were sold in U.S. in 2023.
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I=3
Market perform, €105: Analyst Daniel Roeska of Bernstein Research said the Trump’s tariff on imports from Canada and Mexico will significantly affect the big three from Detroit (GM, Stellantis and Ford). As such, he assumes that the tariffs will not be applied in practice. He added that Volkswagen imports a relatively large number from Mexico.

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Trump’s tariff could impact Volkswagen’s 2025 EBITDA by around 15.2%, S&P Global says

  • S&P Global estimates that Trump’s 20% tariff on EU imports and 25% tariff on Mexico and Canada imports will lead to an headwind of around 15.2% on Volkswagen’s 2025 EBITDA estimate.
  • Analysts expects Volkswagen to generate EBITDA of €39.4 billion in 2024, hence an headwind of 15.2% is equivalent to €6.0 billion.
  • S&P Global expects the headwind to be materially mitigated.

https://www.spglobal.com/ratings/en/research/articles/241129-auto-industry-buckles-up-for-trump-s-proposed-tariffs-on-car-imports-13340097

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I=3
Volkswagen said it’s concerned about Trump’s tariffs but is open for cooperation and dialogue.

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Volkswagen is considering producing Porsche and Audi models in the US to cope with Trump’s planned tariffs

  • Volkswagen is considering producing some Audi and Porsche models in the United States in order to reduce the impact of Trump’s tariffs, Handelsblatt reported citing company insiders.
  • “We do not comment on speculation,” the company responded to a request for comment.
  • The insiders pointed out that the company is considering expanding its plant in Chattanooga and South Carolina.
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There is a general consensus that Trump’s 25% tariff on Mexico tariffs would impact Volkswagen’s EBIT by around 2.5 billion euros

  • Trump has announced 25% tariff on all imports from Mexico and Canada.
  • Some analysts such as Philippe Houchois of Jefferies and Daniel Roeska of Bernstein have downplayed the impact of the tariff’s on Volkswagen due to its positioning.
  • However, according to Mexico’s statistics agency, Volkswagen exported 526,535 vehicles to the US from Mexico last year, around 50% of Volkswagen’s North America sales.
  • Others such as Jose Asumendi of JPMorgan, RBC and Stifel analysts believe that the tariff’s pose a risk to Volkswagen’s earnings.
  • According to RBC, the tariff will affect 600,000 Volkswagen Group units and reduce its EBIT by 9%.
  • Stiffel projects that the tariff could reduce Volkswagen’s 2025 revenue and operating income by 8 billion euros and around 12% respectively.
  • Moody’s expects the Mexico tariff to lead to an headwind of 15% on Volkswagen’s profits.
  • Volkswagen doesn’t produce any units in Canada. However, it was planning to start producing battery cells in a €4.8 billion plant in St. Thomas. Only site preparations have been done at the plant and US sites had been considered. Volkswagen is set to receive federal subsidies amounting to $8-$13 billion over 10 years by building the plant in Canada. However, this subsidy will only be in place as long as the U.S. Inflation Reduction Act remains in force. President Trump has already suspended the Inflation Reduction Act (IRA) funding disbursements. Andreas Schotter, a professor at Western University’s Ivey business school said the 25% tariff will make the St. Thomas investment unattractive for Volkswagen since batteries account for about 60% of an EV cost.

Assessment
My analysis also established that the 25% tariff will likely lead to an headwind of around 8.3 billion euros on Volkswagen’s 2025 revenue. However, this doesn’t consider other things such as the general impact on US consumers that these tariffs would cause and competitive dynamics. If we go by analysts estimates that the tariff will cut 2025 operating margin by 9%-15% (12% at the midpoint), the EBIT headwind will be around 2.5 billion euros.

While the tariff is unlikely to cause much losses for Volkswagen in Canada, a pause in investment will interupt Volkswagen’s electrification agenda. Similarly, shifting the plant to the US will not be advantageous in any way due to Trump’s attack on IRA.

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What’s your analysis of the current situation? Can you remind me if Volkswagen also imports from other countries like Germany into the U.S. or if the impact will only be coming from Mexico Tarifs?
Will the fact that certain car parts are going to be affected by tariffs have an effect on Volkswagen and if yes how high in which scenario?

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Volkswagen brand, Audi and Porsche said during the recent earnings call that it will try to find a “sweet spot” with regards to the tariffs. That’s a scenario where they pass on pricing without significant impact on sales volume. Considering that the tariff is an industry headwind, I expect all these brands to be able to pass on the tariff cost to customers with limited impact on sales volume. Audi and Porsche being luxury brands should be in a better position to do so and Volkswagen brand being an economy brand will not be able to pass on a large part of it. My base case assumes Volkswagen brand absorbs 80% of the cost, Porsche absorbs 50% and Audi absorbs 60%. My weighted headwind on operating profit is €4.4 billion (Worst case scenario: €6.9 billion, Best case scenario: €3.5 billion, Base case scenario: €4.4 billion).

The major headwind will come from Europe since vehicles imported there are mostly premium and luxury vehicles. Volkswagen Group exports around 243,000 units to United States from Europe (premium and luxury vehicles: 227,000) and 309,000 from Mexico. Europe and Mexico thus make up around 76% of Volkswagen Group’s exports to the USA. Volkswagen only produces around 175,000 vehicles in US, hence the headwind from the tariff on parts is minimal. Using Cox estimate of $500(€460), the headwind from the tariff on parts will only be €80 million.

@Magaly’s insights on how pricing and sales volume will develop as a result of the tariff will help me assess the impact better.

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Oh i assumed that half of Volkswagen group cars are produced in the United States as stated here? Or are the 175,000 cars refering to the Volkswagen brand?

I think it would be a good idea to develop an comprehensive article in Notion which gives an overview of the situation incl. a description where major factories are located.

The argument that Trump is making here is good and should be considered in our models. If prices rise overall cars produced in the united states will have a way higher margin and actually benefit from the tariffs. (Given that sales don’t collapse and demand doesn’t shift significantly to used cars - which could be a major factor imo)

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The 175,000 units refer to the Volkswagen brand production capacity in its only US plant, the Chattanooga plant, in 2023. In 2024, Volkswagen Group sold 727, 260 units in the US. Here is a an estimate breakdown of the production location for these units;

  • Around 155,908 units were produced in the US.
  • Around 233,630 units were produced in Europe.
  • Around 337,722 units were produced in Mexico.

I will point out that units produced aren’t always the same as unit sales. But I am using unit sales here since the data is easily available.

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My new estimate is a weighted headwind of €3.4 billion (worst case scenario: €6.2 billion). This is lower than my earlier estimate of €4.4 billion, because I now assume the tariff will also impact sales, not just margins.

Given that Volkswagen imports around 78% of its U.S. sales and has limited local production capacity (only 175,000 units), I expect the profit tailwind from U.S. production to be negligible.

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Trump said Mexico and Canada USMCA eligible products will continue to be exempted from the additional tariff for now. Volkswagen already confirmed that its North American assembled VW-brand vehicles are eligible for the exemption. That means only the Audi and Porsche models are currently affected by the tariff. My weighted operating profit headwind for Audi and Porsche is €2.1 billion (Worst case scenario: €4.0 billion).

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I=3
Analyst Jose Asumendi of JPMorgan said he has lowered his earnings estimate for Volkswagen by around a quarter due to the tariffs.