Car companies are bracing for what could be an even bigger shock to the global automotive supply chain than the Covid pandemic amid uncertainty over the duration and extent of Donald Trump\u2019s global tariff war.\u00a0<\/p>\n
Just two days after the US president issued an executive order applying tariffs of 25 per cent to all imports from Canada and Mexico, as well as 10 per cent on goods imported from China, Trump put levies on Mexican imports on hold for a month following a \u201cvery friendly\u201d conversation with Mexican President Claudia Sheinbaum. Shortly afterwards, Canadian Prime Minister Justin Trudeau also reached an eleventh-hour deal with the US for a 30-day pause on tariffs.<\/p>\n
Carmakers have been cautious about making significant and costly strategic changes without more clarity on the longer-term direction of US trade and energy policy, although executives at General Motors, Stellantis and Tesla have signalled they will increase manufacturing in the US to offset any impact of tariffs.\u00a0<\/p>\n
\u201cIf you start overreacting, it\u2019s a bit dangerous now,\u201d Michael Lohscheller, chief executive of Polestar, the electric-car maker backed by China\u2019s Geely, said in a recent interview.\u00a0<\/p>\n
What could be the worst-case scenario? <\/h3>\n
Many car executives had turned to the experience of Trump\u2019s first presidency in playing down the risk of an international tariff war, saying the US president had not carried through on threats of additional levies against its trading partners.\u00a0<\/p>\n
Supply chain experts say the worst-case scenario, in which both US and retaliatory tariffs are implemented, would be likely to lead to a chain of bankruptcies among weaker car parts suppliers.\u00a0<\/p>\n
The global automotive supply chain is so complex and interconnected that a component made in Mexico could end up at an American plant before going back to Mexico for final assembly and then being sold to the US market \u2014 which could result in \u201ca tariff-on-tariff\u201d situation.\u00a0<\/p>\n
\u201cThe mechanics of it are almost as bad, if not worse than the actual amounts because the accounting and book-keeping and paperwork requirements involved to ensure compliance are massive,\u201d said Ian Henry, an automotive production expert who runs the AutoAnalysis consultancy.\u00a0<\/p>\n
Henry warned that the supply chain disruption could be worse than during the pandemic if a tariff war endured and carmakers were not able to provide enough financial support to keep their suppliers afloat. <\/p>\n
Mikael Bratt, chief executive of Swedish seatbelt and airbag maker Autoliv, said it would immediately begin discussions to pass on the cost of higher tariffs to customers if they were implemented against Mexico.<\/p>\n
\u201cThere is no reason at all why we\u2009.\u2009.\u2009.\u2009absorb any cost like that,\u201d Bratt said at an earnings briefing last week. \u201cUltimately, it will be higher cost for vehicles sold in the US.\u201d<\/p>\n
Which carmakers are most exposed? <\/h3>\n
The traditional \u201cBig Three\u201d carmakers, which have spread their footprint across the continent since the 1994 signing of the North American Free Trade Agreement, are the most vulnerable to a hit to profits. GM was the most exposed, analysts said, with Chrysler owner Stellantis not much better off. Ford is the least exposed because it imports the smallest share of vehicles from outside the US.<\/p>\n
GM makes its popular, high-margin Chevrolet Silverado at its Silao plant in Mexico and Oshawa in Canada, which increases its exposure. BNP Paribas analyst James Picariello said that while the carmaker could probably shift production to the US for about 300,000 of the 350,000 trucks it currently imports, such a switch would take 12-18 months as it adjusted supplier shipments and hired workers.<\/p>\n
That would add about $1bn in labour costs, he said, as workers earned more in the US than in Mexico. GM\u2019s operating earnings would take a 7 per cent hit, but that looked favourable compared with a possible 50 per cent reduction that could come from a 25 per cent tariff.<\/p>\n
\u201cA billion dollar headwind seems like a manageable scenario right now,\u201d Picariello said.<\/p>\n
Investors and analysts were assuming that any tariff on goods from Canada and Mexico would ultimately be negotiated down, he added, because otherwise \u201cthe numbers get too large for the industry to properly survive.\u201d<\/p>\n
Are German carmakers spared if tariffs are not imposed against the EU? <\/h3>\n
Even before any tariffs against the EU, European carmakers are exposed. Volkswagen is in the worst position, with 45 per cent of its US sales coming from cars made in Mexico and Canada, although the American market accounts for a small share of the group\u2019s total revenue.<\/p>\n
With all US-sold vehicles from its luxury Audi and Porsche brands manufactured outside the country, Moody\u2019s estimates that a 25 per cent Mexican tariff will reduce Volkswagen group\u2019s global earnings before interest and taxes by more than 15 per cent.<\/p>\n
\u201cWe have a factory in Mexico and, independently of which administration is at work, our plan is to become stronger in the US,\u201d Audi chief executive Gernot D\u00f6llner said last month. But he added: \u201cWe think that tariffs are wrong and we believe in free trade.\u201d\u00a0<\/p>\n
Fellow German carmaker BMW is less exposed, as 65 per cent of its cars in the US are built locally while it is also a net exporter from the US.\u00a0<\/p>\n
\u201cThere might be volatile situations that could be less predictable, but I\u2019m really optimistic\u201d about the US, said Jochen Goller, BMW\u2019s board member in charge of customer, brands and sales. \u201cI think it will be one of the growth markets for us in the next year.\u201d\u00a0<\/p>\n
Will Tesla emerge as a winner from Trump\u2019s tariffs? <\/h3>\n
Investors have pinned hopes that Elon Musk\u2019s close ties to Trump will shield Tesla from the fallout from the president\u2019s policies, but the world\u2019s largest electric vehicle maker is still exposed.\u00a0<\/p>\n
Tesla assembles all its vehicles sold in the US locally but it sources 20 to 25 per cent of its components for the Model 3, Model Y and the Cybertruck from Mexico, according to Barclays.\u00a0<\/p>\n
\u201cOver the years, we\u2019ve tried to localise our supply chain in every market, but we are still very reliant on parts from across the world for all our businesses,\u201d chief financial officer Vaibhav Taneja said at an earnings briefing last week, warning of a hit to its profitability from Trump\u2019s tariffs.<\/p>\n
The company could also be a target of retaliatory tariffs by Canada. Former finance minister Chrystia Freeland, who is running to replace Trudeau as prime minister, has said Ottawa should retaliate against US tariffs by adding huge levies on Tesla vehicles to punish Musk.\u00a0<\/p>\n
The tariff war also comes as Tesla grapples with declining sales in Europe due to slowing demand for electric vehicles, heightened competition and a consumer backlash against Musk\u2019s political activism.\u00a0<\/p>\n
According to French industry association La Plateforme Automobile, Tesla\u2019s January sales in France were 63 per cent lower than a year earlier. <\/p>\n
Which carmakers are the least exposed?\u00a0<\/h3>\n
Smaller Japanese automakers, such as Mitsubishi Motors and Subaru, could benefit from a lack of production in Mexico and Canada.\u00a0Honda is also comparatively well placed, since two-thirds of its US sales are assembled locally, according to Barclays.<\/p>\n