Company calculates full domestic production outweighs benefits of tariff engineering.
Mercedes-Benz will continue to rely on the Port of Charleston when it completes a new manufacturing plant for its Sprinter van in nearby Ladson, S.C., but the imports will take a different form factor.
Since 2006, the German auto and truck maker has reassembled sections of vans at a facility in the North Charleston area, but officials have now decided to step up to full-scale manufacturing to better compete in the growing North American market. Instead of a few large van sections, imports will now consistent of smaller components and sub-assemblies, many of which eventually could be sourced domestically.
Mercedes-Benz officials announced earlier this month that they planned to invest about $500 million in the plant expansion to meet rising demand for large vans in North America, with groundbreaking scheduled in 2016. Mercedes-Benz Vans offers the Sprinter as both a Mercedes-Benz and a Freightliner-branded vehicle. Freightliner is the U.S. truck subsidiary of parent company Daimler.
“Charleston is an excellent location for our new plant,” Volker Mornhinweg, the head of Mercedes-Benz Vans, said in a statement. “The region has very highly-skilled workers, a dense network of reliable suppliers, and an outstanding logistics infrastructure that includes good transport connections to the nearby harbor. Just as important is the very good cooperation and support we’ve experienced at the local, municipal, and state levels.”
The United States is the second largest market for the Sprinter after Germany. Last year, the company sold about 26,000 Sprinters in the United States and controls about 9 percent of the country’s large van market. Officials say the sales opportunity justifies switching to an in-sourcing model.
The vehicle manufacturer initially imported the commercial vans for several years, but nine years ago created an elaborate supply chain scheme to reduce high customs duties.
The 25 percent tariff on imported vehicles, commonly referred to as the “chicken tax,” traces back to a trade dispute with Germany and France. They believed the United States was dumping chickens on the market at prices below the cost of production, so the European Union imposed a tariff on American chicken imports. President Lyndon Johnson retaliated by slapping a 25 percent tariff on several products, including light trucks. Eventually, the tariffs were lifted on all the items, except the light trucks.
For the past nine years, Mercedes-Benz has shipped fully built vans from its plant in Dusseldorf to the Port of Bremerhaven, where they are disassembled. The engine, transmission and rear-axle are removed and put in one container, which can hold several kits. The van body is placed on a custom-built wooden skid and inserted by forklift in another container, Mercedes-Benz USA spokesman Christian Bokich said. Two van bodies can fit in each container. Separating the components and frame helps prevent theft, in addition to meeting product classification rules, he said.
From the Port of Charleston the containers are trucked 20 miles to the assembly facility. The containers, frames and pieces are coded with radio frequency identification tags so the pieces are put on the exact vehicle from which they were stripped.
The 140 employees in Ladson can reassemble about 75 vans per day.
The process adds about 9 percent to the cost of the Sprinter, but that pales in comparison to the duty on importing finished vehicles.
Mercedes-Benz officials say building the van in the United States will reduce the cost and long delivery time for customers, enabling the company to increase sales and better compete with rivals such as Ford.
“We can cover the growing demand for large vans in the North American market economically only if we produce the vehicles locally in the NAFTA region,” Mornhinweg said last October when Mercedes-Benz laid out its Sprinter production strategy.
The need for a more competitive product has intensified because U.S. automakers are beginning to near-shore production of Euro vans, which are characterized by their narrow, high configurations for urban settings and sophisticated stability control systems that don’t let them tip over. Dodge, for example, recently began producing a rebadged van in Mexico, primarily for the U.S. market. Ford last year began producing its full-size Transit van, to replace the Econoline, at its expanded assembly plant in Kansas City.
Ironically, the chicken tax also bit the domestic automakers it was designed to protect. Global expansion led to local development and manufacturers have opted to introduce some popular overseas products to the U.S. market.
Ford imports the Transit Connect, a smaller version with a shorter wheelbase, into the U.S. market as a passenger van. At the Port of Baltimore stevedores for Wallenius Wilhelmson Logistics convert them into cargo vans by removing the seats and seat belts, and replacing the windows with sheet metal. Ford last year shifted Transit Connect production from Otosan, Turkey, to Valencia, Spain.
The conversions were Ford’s way of skirting the chicken tax, which doesn’t apply to passenger vans.
But Ford’s tariff-engineering scheme may have backfired. In 2013, U.S. Customs and Border Protection ruled that Transit Connects imported as passenger wagons and later converted into cargo vans are subject to the 25 percent duty applicable to cargo vehicles, rather than the 2.5 percent duty applicable to passenger vehicles, according to Ford’s 2014 annual report. CBP is taking action to collect the difference in duty rates for prior imports of Transit Connect conversions. Ford’s protest of CBP’s ruling was denied and the company has filed a challenge in the U.S. Court of International Trade. The Dearborn, Mich., automaker is paying the higher duty rate for current imports.
The company declined to comment on the pending litigation.
The Ford ruling bears similarities to a case involving footwear with textile bottoms, Larry Ordett, a Miami-based partner at trade attorney Sandler, Travis & Rosenberg, said. Footwear importers for many years glued fabric to the rubber outsoles of certain types of shoes to take advantage of lower duty rates. The tariff for rubber-bottomed shoes is at least three-times more than ones with a fabric outsole. Several years ago, U.S. Customs agreed that the tariff engineering was appropriate because the shoes are sold in the exact condition as they are imported.
There is one key difference, however, between the cases: Ford is altering the imported product, which would be analogous to footwear companies pulling off the thin textile layer before selling them.
Fiat-Chrysler is following the same blueprint for its Ram ProMaster City van, which is built in Bursa, Turkey. The company began importing the vehicles through the Port of Baltimore in December. The small van is converted from passenger to cargo configuration at a Chrysler facility adjacent to the port, according to Ram Truck spokesman David Elshoff. The process involves removing seats, carpet, headliners and windows, and adding customized shelving and racks for commercial requirements.
“We worked with the appropriate regulatory agencies from the outset to ensure our plan meets both the letter and spirit of the law,” Elshoff said.
The U.S. tariff on light trucks is likely on the table as negotiations continue for the Trans-Pacific Partnership and EU free trade agreements, but whether it gets reduced remains to be determined.
Meanwhile, Mercedes-Benz this summer plans to start importing a midsized van called the Metris using the same disassembly and kitting process. The Metris is made in Vitoria, Spain, and will also be shipped by sea via Bremerhaven to North Charleston. Mercedes-Benz Vans will add another 60 employees and begin production in mid-summer, Bokich said.
South Carolina officials are hopeful that Mercedes-Benz will anchor an automotive hub in the Charleston metropolitan area, which could bring additional suppliers to the region similar to those that followed BMW to Spartanburg in upstate South Carolina more than 20 years ago, Allison Skipper, director of marketing and communications for the South Carolina Department of Commerce, said. Such a development would likely diminish Sprinter-related import volumes, but the arrival of the Metris will help replace Sprinter shipments. Mercedes-Benz last year moved about 10,000 TEUs through the Port of Charleston.
“Growth of South Carolina’s automotive cluster provides significant volume opportunities for the port and boosts the overall economic position of our state,” South Carolina Ports Authority Chief Executive Officer Jim Newsome added in a statement.
The state of South Carolina is providing job development credits and a $14 million grant to assist Mercedes-Benz with land improvements, but Gov. Nikki Haley said the state did not get into a bidding war because it can’t afford big incentive packages.
This article was published in the May 2015 issue of American Shipper.
Mercedes to build vans in S.C.
