In the tariff wars, VW’s build-cars-everywhere strategy now looks clever

Open this photo in gallery:

Most auto executives have zero interest in Rwanda and probably couldn’t find it on a map. And why would they?

One of the smallest and poorest countries in Africa, it has no car industry and almost no car sales. The few who can afford cars pick up imported, second-hand bangers and drive them into the ground.

Rwanda wasn’t too small to escape the attention of Volkswagen, which vies with Toyota for status as the world’s biggest – and most globalized – auto maker. Late last month, VW opened Rwanda’s first car plant in Kigali, the capital, where it will assemble a cheapo version of the small Polo hatchback. Production will eventually hit 5,000 cars a year and they will be used primarily for new car-sharing and ride-hailing services.

VW has also built, or plans to build, assembly plants in Kenya, Nigeria, Ghana and Ethiopia in the belief that the sub-Saharan car market, as with China’s 20 years ago, is set to take off as incomes rise and roads are developed.

But – suddenly – VW’s global footprint strategy comes with an added benefit. It allows the German car giant to play the new tariff game to its advantage. At last count, VW had 122 plants scattered around the planet. The vast geographic portfolio means the company can shift production to the markets in which it sells cars, a process made all the easier by the use of common platforms. For instance, VW’s vast plant in Bratislava, Slovakia, pumps out three SUV models with the same platform – the VW Touareg, Audi Q7 and Porsche Cayenne.

If the tariff battle evolves into a global tariff war – there is no telling where it will go as tariffs breed retaliatory tariffs – VW no doubt will shift production to sites where tariffs can be avoided. Among the Big Three German auto companies (VW, BMW and Daimler, owner of Mercedes-Benz), it is best positioned to insulate itself from the nationalism trend triggered by Donald Trump.

Still, VW cannot fully escape the carnage; it will get hit pretty hard, just somewhat less so than its German rivals. The Trump administration has slapped hefty tariffs on Canadian, Mexican and European steel and aluminum exports to the U.S. market and autos could be next as the great game of tariff chicken sweeps the global auto market.

President Donald Trump has threatened to impose duties of 20 per cent on cars imported from the European Union. He is placing tariffs of 25 per cent on US$34-billion of Chinese products, starting Friday. In a tit-for-tat move, China will impose similar tariffs on a similar value of American goods. China already imposes a tariff of 15 per cent on imported cars (down from 25 per cent). The extra 25 per cent levy would boost the import hit on U.S.-produced autos to a murderous 40 per cent, making them unaffordable for most Chinese.

Any European car company that both exports cars to the United States, and builds cars in the United States for export to China, faces a beating. Topping that list are BMW and Daimler. According to Evercore, a U.S. investment banking advisory firm, BMW was expected to export 65,000 vehicles, mostly expensive SUVs, from its American plants to China this year. For Daimler, the equivalent figure was 57,000 (Ford and Fiat Chrysler also export cars from their American plants to China, but in much smaller amounts).

By design or sheer luck, VW exports no autos from its small American operations to China, although 43 per cent of the autos it sells in the United States are produced outside of the North American free-trade agreement. That non-NAFTA production stands to get hit by Mr. Trump’s new tariffs. Still, VW’s market share in the United States, at 2 per cent, is tiny, suggesting that erecting walls around the United States will not severely damage VW. Pain yes, but certainly not a gaping wounds like the ones BMW and Daimler will suffer.

The tariff wars, should they endure, will inevitably encourage car companies to shift from global production – a few big plants supplying a lot of markets – to regional production. It is the reverse of the strategy that has been pursued by the auto makers in recent decades, when plummeting tariff and non-tariff barriers meant you could make a car on one side of the planet, sell it on the other side and still make a profit.

That era is screeching to a halt. VW has made a lot of mistakes recently, including the hideously costly diesel-emissions scandal. But building up regional production, even in small African countries, was not one of them. VW shares have fallen since Mr. Trump threatened car tariffs but they are still up more than 5 per cent in the last year, while the shares of BMW and Daimler have gone in the opposite direction. VW will survive the tariff wars.