EUROPEAN capital goods companies are starting to show the strain of the United States’ trade conflicts with China and other countries, as tariffs push up costs for machine parts and raw materials and threaten to worsen supply bottlenecks.

Makers of machines that rely on thousands of small parts from around the world, from Swedish lawnmower maker Husqvarna to wind-turbine manufacturer Siemens Gamesa, are feeling the effects on their supply chains.

Carmakers, directly in the firing line with tariffs on cars built in the United States for export to China hiked to 40 percent, have already raised the alarm on profits and price hikes.

But analysts estimate that between 65 and 80 percent of the US$34 billion in affected goods shipped from the United States to China are not sold directly to consumers but are rather key components used in other products.

“While some of the ‘direct’ financial exposures are quite limited, we believe that it is the ‘indirect’ effects that could be more meaningful,” Morgan Stanley capital goods analysts Ben Uglow and Lucie Carrier wrote in a note published last week.

“So far, most companies have not provided much details regarding the risks related to these tariffs whether this is in terms of their supply chain or direct exposure — and we see this situation as an overhang to our sector currently.”

Investors in European capital goods companies, which have been riding a wave of global economic growth, have not really flinched so far.

After the United States announced steel and aluminum tariffs March 8, investors fled industrial funds during March and April. But they made a U-turn and returned in May, Thomson Reuters Lipper data showed.

Furthermore, the Dow Jones European industrial goods and services index has outperformed the wider European stocks index by 2 percent since the latest tariffs were imposed July 6.

Michael Nicol, European equities investment manager at Scottish asset manager Kames Capital, is an outlier, having significantly cut exposure to the industrial sector over the past nine months, also due to already-full valuations.

“It is impossible to accurately predict the final outcome of the various proposed tariffs but for the portfolio manager clearly market and stock specific risk has increased,” he said.

Morgan Stanley estimates that machinery, engineering and lighting groups are most vulnerable to tariffs among European capital goods companies.

It singled out Wartsila, Siemens, GEA, Kion, IMI, Rotork, Osram, Weir, Senvion, Schindler, Signify and Zumtobel. The new U.S. tariffs impose duties of up to 25 percent on 818 categories of Chinese goods ranging from plastic tubings and parts used for connectors to printed circuit boards and medical imaging equipment.

Supply for electrical goods firms is most at risk, Morgan Stanley says, as China makes nearly half of the world’s printed circuit boards, used in computers to transformers to medical equipment, and a fifth of all electronics.

German industrial group Siemens said Thursday it saw a risk that its customers would slow spending because of supply-chain issues.

(SD-Agencies)