Navigating Tariff Turbulence: German Auto Equity Opportunities in U.S. Production Shifts

The U.S. automotive tariffs implemented in 2025 have turned Germany's export-driven auto sector into a battleground of risk and opportunity. With a 25% levy on imported vehicles and parts, German automakers face a stark choice: absorb costs, pivot production to the U.S., or risk losing market share. Enter Chancellor Friedrich Merz's “car tariff offsetting mechanism,” a policy designed to turn this crisis into a strategic realignment of global supply chains. For investors, the calculus is clear: companies that leverage U.S. production volumes to mitigate tariffs could unlock undervalued equities with outsized upside. Here's why—and where to look.

The Tariff Mechanism: A Lifeline for Producers

The Merz mechanism ties tariff relief to domestic U.S. assembly. Manufacturers can reduce their 25% tariff liability by 3.75% of their vehicles' MSRP in 2025, rising to 2.5% in 2026, if they shift production to the U.S. (see Figure 1). This incentivizes reshoring of assembly and parts sourcing, directly targeting the ~13% of German auto exports to the U.S. that were at risk of price hikes or halted shipments.

For automakers like Mercedes-Benz (Daimler) and BMW—both with U.S. assembly hubs—this mechanism is a tailwind. Their existing U.S. plants (e.g., Mercedes' Tuscaloosa, Alabama facility) can now generate tariff offsets, shielding their exports from full duty exposure. Meanwhile, competitors like Volkswagen, which lacks U.S. assembly capacity for certain models, face pressure to invest or risk losing profitability.

BMW's shares have outperformed Daimler and the broader market since 2024, reflecting its U.S. production advantage.

Operational Leverage: Winners and Losers

The mechanism rewards companies with operational flexibility to shift production and supply chains. Key themes:

1. U.S. Production Powerhouses:
2. BMW (OTCMKTS:BAMXF) and Daimler (OTCMKTS:DDAIF) are best positioned. BMW's U.S. plants produce 30% of its global SUV output, while Mercedes' Alabama factory supplies both domestic and export markets. Both can scale U.S. production to maximize tariff offsets.

3. Risk: Higher fixed costs from U.S. investments, but the offset's 3.75% rate effectively subsidizes this shift.

4. EV Plays with Global Reach:

5. Volkswagen (OTCMKTS:VLKAF) faces a dual challenge: limited U.S. assembly capacity and EV competition from Tesla. However, its planned $21B U.S. investment, including a new EV battery plant in Tennessee, positions it to capitalize on offsets while addressing its Tesla disadvantage.

6. Continental AG (OTCMKTS:CTTAY), a tier-1 supplier, benefits indirectly as automakers ramp up U.S. production. Its U.S. factories (e.g., Indiana) supply critical components like electrified powertrains, reducing tariff exposure.

7. Laggards Under Pressure:

8. Audi (part of VW) and Porsche (OTCMKTS:PAH3Y) face higher tariffs on luxury imports without sufficient U.S. assembly. Porsche's planned South Carolina plant (opening 2026) is a critical risk mitigator but won't yield offsets until 2027.

Supply Chain Diversification: The “Friend-Shoring” Play

The tariffs have accelerated a broader trend toward regionalized supply chains. German automakers are “friend-shoring” to U.S.-Mexico-Canada Agreement (USMCA) countries to meet 85% regional content rules. For instance:

• Stellantis (OTCMKTS:STLAF) retooled its Ontario plant to produce USMCA-compliant vehicles, avoiding tariffs.
• Hyundai's $21B U.S. investment (not German, but a competitive benchmark) highlights the scale required.

German suppliers like Schaeffler (OTCMKTS:SCHA.Y) and Bosch are expanding U.S. parts production to serve local assembly lines, reducing reliance on European exports. Investors should track companies with geographic diversification metrics—e.g., % of revenue from USMCA countries.

The EV Edge: A Tariff-Proof Future?

Electrification is a two-front strategy:
1. Regulatory Tailwinds: U.S. incentives like the Inflation Reduction Act (IRA) subsidize EV production, aligning with tariff mitigation.
2. Market Demand: EVs command 15%+ premium pricing, offsetting tariff costs. Mercedes' 47% market share in German EVs (April 2025) underscores this trend.

VW's EV sales have grown at 25% CAGR since 2020, but remain behind Tesla's scale.

Investment Thesis: Buy the Dip, Play the Shift

• Top Picks:
• BMW (BAMXF): Strong U.S. footprint, EV growth, and 2024 operating profit resilience (€2.9B despite tariffs).
• Continental AG (CTTAY): Undervalued supplier with U.S. production synergies; P/E of 12x vs. sector average of 18x.

• Daimler (DDAIF): Mercedes' EV leadership and U.S. plant leverage.

• Avoid:

• Porsche (PAH3Y): High tariff exposure until its South Carolina plant comes online.

• Audi: Overvalued given its U.S. assembly gap and Tesla competition.

• Catalysts to Watch:

• U.S. tariff offset claims (Q2-Q3 2025 data releases).
• Merz's negotiations with the EU on reciprocal tariffs (delayed until July 2025).

Conclusion: Betting on Resilience

The Merz mechanism isn't just a tariff shield—it's a blueprint for reshaping global auto supply chains. German automakers with U.S. production scale and EV moats are positioned to turn this crisis into a long-term growth story. For investors, the risk-reward is compelling: companies like BMW and Continental offer a mix of undervalued multiples and policy-driven tailwinds. The question isn't whether tariffs will reshape the industry—it's who will emerge stronger.

Actionable Idea: Overweight BMW and Continental; underweight pure-play luxury brands without U.S. assembly. Monitor tariff offset data releases closely—they could trigger a rerating in 2025.

Data sources: U.S. Customs & Border Protection, company earnings reports, Proclamation 10908.