By Ciara Linnane, MarketWatch
Medill News Service
President Donald Trump’s threat to slap 25% tariffs on imported cars and car parts would be a credit negative, and not just for the U.S. but for every segment of the global automobile industry, from car makers to parts suppliers, dealers and transportation companies.
That’s the view of Moody’s Investors Service in a report published Monday, that highlights the pressure tariffs would place on an industry that relies on a complex, global supply chain and is facing major technological changes as self-driving and electric vehicle development continues apace.
Trump on Sunday issued new threats against America’s trade partners, calling for them to remove barriers and tariffs, or face the consequences. Trump has already warned China that the U.S. will seek additional tit-for-tat tariffs on Chinese exports if China slaps retaliatory tariffs of its own on U.S. exports.
On Friday, Trump threatened to put 20% tariffs on European cars in response to the EU’s decision to impose 25% tariffs on more than $3 billion in U.S. goods as retaliation for U.S. tariffs on steel and aluminum that the Trump administration put into effect on June 1.
The effects of the existing tariffs are now showing up in company announcements. Harley-Davidson Inc. /zigman2/quotes/207565294/composite HOG -1.79% said Monday it would have to eat the “substantial” short-term costs of the tariffs imposed by the European Union, but it planned to move some production overseas to ease the burden over the longer term.
Ford Motor Co. /zigman2/quotes/208911460/composite F -3.26% and General Motors Co. /zigman2/quotes/205226835/composite GM -4.00% would be immediately impacted by tariffs, said Moody’s, as both import a large number of vehicles to the U.S. from Canada and Mexico. In GM’s case, about 30% of its U.S. unit sales are supported by imports, while at Ford, the comparable figure is 20%. GM also sources a large portion of its high-margin trucks and SUVs from Mexico and Canada. Ford’s imports are almost exclusively cars, a market it has recently decided largely to exit.
“Both GM and Ford would need to absorb the cost of scaling back Mexican and Canadian production and shifting some back to the U.S.,” Moody’s Senior Vice President Bruce Clark wrote in the report. “They would also likely need to subsidize sales to offset the tariffs during the near term, and could eventually pass on the higher costs to consumers.”
The entire supply chain would be disrupted by tariffs, said Clark. Car companies’ strategy of optimizing product cost and timing currently means multiple cross-border trips for finished goods, and that could incur multiple tariff charges. Avoiding those would mean a complete overhaul of the process.
Non-U.S. car manufacturers will be hit harder than their U.S. rivals, particularly those companies that do not have plants in the U.S. Jaguar Land Rover Automotive PLC, for example, has no U.S. production, while Volvo AB /zigman2/quotes/208939564/delayed SE:VOLV.B -4.65% /zigman2/quotes/201027140/delayed SE:VOLV.A -4.49% is planning to start U.S. production next year.
Daimler AG /zigman2/quotes/205332368/delayed DE:DAI -2.05% , BMW /zigman2/quotes/209548467/delayed DE:BMW -2.20% and Volkswagen AG /zigman2/quotes/206736865/delayed DE:VOW -2.57% all import more than half the vehicles they sell in the U.S. from other countries. The breakdown is 50% for Daimler, 70% for BMW and above 80% for VW.
“However, these imports represent only about 12% of BMW’s total annual unit sales, about 8% of Daimler’s global light vehicle sales, and around 3% of VW group sales (figures include sales from Chinese joint ventures),” said Clark. “On the other hand, BMW and Daimler export more than half the vehicles they produce at their U.S. assembly plants. Fiat Chrysler Automobiles NV /zigman2/quotes/209202731/delayed IT:FCA -1.82% produces about half its vehicles in the U.S., with the remaining units imported mainly from Mexico and Canada.”