The global automotive industry is turbulent with Donald Trump’s new “Draconian” tariff regime, which expects automotive executives to raise prices for American vehicles and raise production of US cars to up to $110 billion.
On Wednesday evening, the US president’s announcement that he would impose a 25% tariff on imports of foreign-made cars sparked a scramble to understand the details of the policy and identify potential exemptions that could mitigate the blow to the industry.
Within hours it was revealed that all automakers, Ford and Stellantis, including Tesla and the US Big Three General Motors, would be affected. “We’re all on the same boat,” said a senior executive at a European car manufacturer.
Tariffs aim to boost US industry, but on Thursday morning in New York, Ford and GM shares fell 4.4% and 8.2% respectively. Ford makes more Mexican and Canadian vehicles than its Michigan rivals.
Estimates by Bernstein analysts show that even if the pair readjust their supply chain to use more parts made in the US by increasing prices, they could suffer a 30% profit and tax slump before this year’s interest and tax as a result of the policy.
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Almost half of vehicles sold in the US are imported, but vehicles averagely assembled in the US are sources of almost 60% of parts from overseas.
Bernstein said tariffs could introduce up to $110 billion in annual costs to automakers. The policies analysts and investors described as “worst-case scenarios,” “heavy-handed,” and “devastating,” are unparalleled in scale and resolve, and the dashing industry hopes Trump will return from an escalating trade war.
The 25% collection will come on top of the tariffs Trump has already announced on imports from Mexico, Canada and China. They will come into effect from April 2, along with mutual collections from US trading partners, which are expected to be announced on the same day.
“It’s certainly possible that we can see tariffs on vehicles where some vehicles imported from North America are totaling 40% or 50%,” said Barclays analyst Dan Levy.
The tariffs also applied to core car components such as engines and transmissions while the process was in place to extend taxation to other parts as needed, the White House said.
Bank of America estimated that prices for some vehicles could rise by $10,000, and that US car sales could fall by up to $3 million, or nearly a fifth of last year’s 15.9 million.
“The concern is the affordable price and demand impact of our products made in the US,” said Stellantis Chairman John Elkann.
If tariffs are implemented next week, market research firm Cox Automotive predicted supply chain disruptions will destroy North American vehicle production by mid-April, with U.S. factories predicting that they would have fewer 20,000 vehicles per day, about 30% less than they currently do.
When costs are passed on to customers and US vehicle prices become more expensive, automakers can choose to sell more cars in other markets.
Even before Trump’s announcement, the “midrange” automakers who make vehicles in Mexico were considering cutting sales to the US and selling them in Central America, according to people with knowledge of the plan.
Automakers believe that if they raise prices by 25%, “there are no ways these cars can be sold in the US.”
Elon Musk’s Tesla is in the best position among American automakers, with strong manufacturing bases in the US, but electric vehicles also use many foreign components.
One of the major sources of policy disruptions relates to automobiles and parts complying with the 2020 trade agreement between the US, Mexico and Canada.
Trump previously gave him 30 days off his vehicle and component mandate that meets USMCA rules. According to US government officials, these will only remain free of tariffs until a process is established to apply taxation to non-US content.
“It’s not clear which parts of the tariffs will apply. Not everything is an executive order,” said an official from a European parts manufacturer.
The parts manufacturer warned that they were unable to absorb the tariffs and planned to pass additional tariff costs to consumers accordingly, the person added.
European and British luxury brands like Porsche, Jaguar Land Rover and Bentley have been exposed because of their lack of manufacturing capabilities in the US, but there is more room for many customers to absorb price increases. Ferrari said Thursday that it plans to raise prices for some models by up to 10%, reviewing its financial goals this year.
“The real pain can withstand massive mass market Japanese, Korean and German brands,” the industry consultant said.
According to Morningstar, German BMW and Mercedes-Benz are already not compliant with the USMCA, as they source many of their transmissions from Europe as they are locally assembled by the US.
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Japanese automotive companies will likely be hit hard in 2024 as they sent 1.4 million cars worth $14 billion, worth $400 billion, to the US.
Analysts have widely identified Mazda and Subaru as the most vulnerable as they rely on content sourced from outside the US for vehicles built in the US, but Mitsubishi Motors does not manufacture them in the US.
Seiji Sugiura, an analyst at Tokai Tokyo Intelligence Laboratory, believes that it will impact seven major Japanese automakers by $23.7 billion, with prices falling to losses unless Nissan and Mazda take measures such as price increases.
Before the latest tariffs were announced, Nissan’s new CEO, Ivan Espinosa, said the situation is “very difficult to deal with because there is no clear direction.” He added that the company has created several scenarios so “as soon as you clarify what’s coming, you’re ready.”
