Mercedes finds a better way around the 'chicken tax'

NORTH CHARLESTON, S.C. -- Volker Mornhinweg, worldwide head of Mercedes-Benz Vans, couldn't believe his ears when he learned what Mercedes-Benz Vans has been doing to avoid the American "chicken tax" on imported trucks.

It involved manufacturing -- but not the kind that made sense to Mornhinweg, a trained engineer who prizes logic and efficiency.

For the past decade, to sell its vans in the U.S. without the punitive 25 percent import tariff, Mercedes-Benz built the complete vans in Germany, disassembled them and shipped the pieces to South Carolina, where American workers put them back together in a small kit assembly building here.

That way, the vans emerged as "locally made" -- free of the import tariff.

"I really couldn't believe it," a visibly annoyed Mornhinweg told Automotive News. "To build up and tear down, that's really something that hurts me, personally. And the costs!" he said, shaking his head at the memory.

Mornhinweg made the discovery when he was put in charge of van operations in 2010. Since then, converting the process to something more sensible has been a priority for the company.

Mercedes-Benz Vans intends to phase out that awkward supply chain. Starting with the next-generation Sprinter van, probably in 2018, Mercedes will assemble the vans normally in South Carolina on a new production and paint system that the company is building at a cost of $500 million.

When the company broke ground in July, Mercedes-Benz Vans CEO Michael Balke said that Job 1 would leave the new plant "before the end of the decade." Balke moved from Germany to South Carolina in September to supervise the beefed-up U.S. manufacturing subsidiary. 

"Finally, we have the opportunity to build the Sprinter from scratch here in the United States, from this new manufacturing facility," he said. 

Converting from kit assembly to full-blown manufacturing is a massive change. The South Carolina venture expects to start accepting applications for production jobs in mid-2017, to be followed by an extensive training period, the company said. Eventually, the expanded factory is expected to create at least 1,300 jobs, up from only about 200 today. 

The chicken tax that helped set all this in motion is named for a 1960s trade dispute over U.S. chicken exports to Europe. The U.S. government imposed the truck tariff in retaliation against France and Germany. Volkswagen AG was the obvious target at the time for the tariff on imports. 

The chicken tax has survived politically because it protects domestic truck manufacturers, and it has helped persuade foreign brands to build trucks here. Mercedes executives said the chicken tax was a big reason to expand the South Carolina plant, but not the only reason. 

Growing market demand also prompted the change, Balke said. 

The South Carolina investment is part of a strategy the company calls "Mercedes-Benz Vans goes global." The company has established van plants in Argentina, Russia and China. The U.S. expansion is the latest example. 

"We expect further growth in the U.S., so we are establishing local production where we will be closer to the customer," Balke said. "It makes a lot of sense from a business perspective."