Daily Management Review

Looming US Tariff Not A Deterrent For BMW To Change Its Mexico Production Plans


Looming US Tariff Not A Deterrent For BMW To Change Its Mexico Production Plans
The plan of expansion of BMW into Mexico is apparently ill timed.
Just four days before the imposition the suddenly announced tariffs on all products coming from Mexico by United States president Donald Trump, the German automaker inaugurated its latest final assembly plant in San Luis Potosi, Mexico.
If the tariffs are actually imposed on Mexico, the cost of the 3 Series sedans BMW that the company is now exporting from Mexico to the US would go up by hundreds of dollars. However that is not deterring the company.  
“We will keep our plans and we will see how far that goes,” said Oliver Zipse, a member of BMW’s board of management in reply to a question of whether the company would be shifting its production base outside of Mexico in case the tariffs are imposed. “Our production network is flexible, but at this point I don’t see any reason to change our plans.”
How it would deal with the additional costs for every vehicle because of tariffs has not yet been decided by the company, Zipse said. The pricing strategy, in the wake of tariffs, for by rivals for cars that compete with the 3 Series, such as the Mercedes-Benz C class, to handle the additional costs, would determine BMW’s strategy and decision of whether to absorb all of the additional costs because of the tariffs or to pass one all or part of the costs to its customers in the US, the company said.
Analysts and investors viewed as a smart move, the decision of BMW to construct the $1 billion factory in Mexico back in 2016. This was because the new 3 Series sedans that would be manufactured in that plant would be shipped to various markets of the world including the very critical market of the US.
When that decision was taken by BMW in 2016, there was hardly any talk of the scrapping of the North American Free Trade Agreement which would stop the significant cost advantage to auto manufacturers from setting up factories in Mexico because of lower labor costs. There were many who did not pay heed to the threats from the then US presidential hopeful Donald Trump of scrapping the NAFTA if he elected as US president.
The new United States-Mexico-Canada Agreement has now virtually made the NAFTA a dead deal even though the new deal has to get ratified by the parliament of all of the three nations. But what is more worrying for all auto makers with manufacturing facilities in Mexico is that potential imposition of a 5 per cent tariff on all goods entering the US from Mexico which is a tool being used by Trump to pressurize its Southern neighbor to stop illegal immigration through the US Mexico border. .
“The timing of new tariffs and related uncertainty could not come at a worse moment for the auto industry,” LMC Automotive wrote in a research note.
BMW’s assembly lines in San Luis Potosi are just ramping up production with an aim of achieving an output of about 20,000 units this year.