Volvo Cars warned higher tariffs imposed on cars imported to the US from Europe would be a “significant blow” to the business, after a year when global trader frictions pressured margins.
The Swedish carmaker suffered a steep fall in profit margins last year as the global trade war that forced its Chinese owner, Geely, to postpone a planned flotation also hit its margins.
Volvo’s sales rose 21 per cent to SKr252.7bn ($27.5bn), but net income fell 4.3 per cent to SKr9.78bn, while profit margins fell to 5.6 per cent in 2018, compared with 6.7 per cent previously.
The fall in operating margins puts pressure on Volvo’s strategy to catch the profitability of premium rivals such as Germany’s Daimler and BMW, which have operating profit margins of about 8 per cent.
Hakan Samuelsson, the Volvo Cars chief executive, said the company had mitigated the US-China trade war by shipping XC60 sports utility vehicles from its Swedish plants to the US, rather than from its Chinese facility.
But he said European tariffs imposed by the US would be a “totally different situation”.
“We have no plans to mitigate that — that would be a significant blow,” he told the Financial Times. “It would mean we would have to put prices up, that would mean more expensive premium cars for consumers” in the US.
Donald Trump has threatened to raise tariffs on cars imported from Europe, as part of his strategy to redress trade imbalances and encourage American consumers to buy US premium brands rather than German nameplates such as Mercedes-Benz or BMW.
Volvo recently opened a plant in South Carolina that it planned to use for global exports of the S60 saloon, but the company said it might repurpose the facility if the US imposed much higher tariffs on imported cars.
The company is still aiming for annual sales of 800,000 vehicles — up from 640,000 last year — and raise its profit margins to the level of its rivals by 2020, Mr Samuelsson said.
“We have to focus more on cost performance within the company,” he said, though ruled out any job losses such as those announced by other carmakers including Ford, Jaguar Land Rover and General Motors.
Mr Samuelsson expects 2019 to be “tough” adding that “there are clear signs” that the cyclical industry is entering a period of contraction.
Volvo’s results come amid a torrent of profit downgrades across the industry, with Daimler on Wednesday warning that 2019 would be “adversely affected”, while Toyota downgraded expectations for its 12-month profit to March by 21 per cent.
Fiat Chrysler Automobiles and JLR will announce results on Thursday, and are expected to echo warnings about the outlook for the sector.
Volvo’s sales are still a record for the company, and follow a strong final quarter when operating profits rose 25 per cent to SKr4.5bn, with margins of 6.2 per cent, up from 5.9 per cent in the same quarter a year earlier.
Sales in the fourth quarter rose 7.3 per cent to 169,700 vehicles, leading to a 20 per cent rise in revenues to SKr73bn.
Last year Volvo’s owner Geely put a planned initial public offering of the carmaker’s shares on ice over concerns that the global trade war would hit the long-term value of the business.
“For 2019, we see another year of volume growth as we continue to benefit from our strong product programme and increased capacity,” said Mr Samuelsson. “But we have to be realistic and acknowledge that margins will remain under continued pressure.”