The protectionist crusade of the Trump administration has attacked the global world order the West was instrumental in creating. This disruption has caused tremendous harm to complex international supply chains, the repair of which will be expensive and will be profoundly disruptive to future business planning and investment plans.
Less than five months after opening its first US plant, the Volvo Group is now canceling production plans for much of its lineup to avoid tariffs the US and China have enacted on auto imports.
The Swedish brand halted S60 sedan exports to China and will stop US imports of XC60 sport utility vehicles from China and reduce shipments of S90 sedans built there.
Anders Gustafsson, the president of the carmaker’s US unit, told Bloomberg that the company intends to pivot from plans to export half of the S60s built at its factory in Charleston, South Carolina, to now only focus on the domestic market - a significant move that could lead to lower production numbers. The company still expects to export S60s to Europe from Charleston and will continue to import the XC60 from Europe to the US.
“We’ll go at this change not with a smile, but we know what we need to do,” Gustafsson said in a speech to the Automotive Press Association in Detroit Thursday.
“We have a global manufacturing structure that helps us maneuver in these tough waters.”
President Trump imposed tariffs of 27.5% on Chinese auto imports in July. China then retaliated with 40% duties on American autos, which drastically escalated the trade war.
Gustafsson said Volvo has not passed along costs related to the tariffs of the XC60 it imports from China to its customers, and that has since led to severe margin compression.
“We are absorbing the tariffs, and that really is what you saw in our financial results,” he said in an interview before the speech.
“But we can, under no circumstances, absorb tariffs in the long run. It’s huge.”
Gustafsson traveled to Charleston last week to visit the S60 production line. Capacity could ramp up to about 50,000 S60s next year.
In 2022, Charleson will add production of the XC90 and employment could expand to 3,900 from 1,200.
However, as the trade war will most likely deepen into a full-blown economic battle between the US and China in 2019, it is expected those production numbers could greatly suffer.
"We might need to make the XC90 in another country too if tariffs keep up," Gustafsson added.
President Trump's trade war has disrupted the carmaker, which its $1.1 billion Charleston plant is now in the crosshairs.
Tearing up production plans to avoid tariffs could be a costly repair for Volvo.
“This is not easy, it’s a big, big, big thing,” he said in the interview. “It’s extremely painful. I don’t want to sit here and smile and say everything is great. Absolutely not. But that’s life.”
Add Volvo to the list of companies greatly suffering under the President Trump's trade war.
Disruption and reworking international supply chains involve lots of time and money, something that the global economy cannot afford so long into a mature expansion. That is why an economic slowdown could materialize for developed economies in 2019 - most likely will be blamed on the trade war and perhaps monetary tightening by the Federal Reserve. Storm clouds are here.