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May 31, 2019 1:00 PM, EDT

BMW Factory Caught in Trump’s Mexican Standoff

BMW Construction on a BMW plant underway in Mexico. (Susana Gonzalez/Bloomberg News)

President Donald Trump’s vow to impose a 5% tariff on Mexican goods comes just in time to hit exports from a $1 billion BMW AG factory that opens in the country next week.

A swathe of the 3-Series sedans to be made at the plant in San Luis Potosi are destined for U.S. dealers. Higher duties mean a hard choice for the Bavarian automaker — raise sticker prices or take the hit to profits on its best-selling model.

It’s not the kind of calculation executives were expecting to make when they chose to build BMW’s first factory in Mexico, with its low labor costs and zero duties on exports to the world’s second-biggest car market. The tariffs will take effect June 10, Trump said in a Twitter post May 30.

It’s another blow for a company whose sales are falling as German rivals challenge its dominance of the premium car segment, pushing profits to decade-lows. BMW spent years surfing on demand for prestige vehicles among China’s emerging middle class, leaving it brutally exposed as Washington and Beijing erect new tariff barriers in an escalating trade dispute.

The Mexican factory is expected to account for one-fifth of BMW’s North American production. BMW produces most of its cars for North America in South Carolina but leans heavily on components imported from Mexico. It bought $2.5 billion worth of parts from Mexican suppliers in 2015.

BMW now is expected to ramp up Mexico output slower than originally planned, said Juergen Pieper, head of automotive research at Bankhaus Metzler. In a research note May 31, Evercore ISI analyst Arndt Ellinghorst said the tariffs could be a “major blow” for BMW and other carmakers.

“MAGA clearly does not stand for ‘Make Auto Great Again,’ ’’ he wrote.