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’s global tariff war.
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 “very friendly” 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.
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.
“If you start overreacting, it’s a bit dangerous now,” Michael Lohscheller, chief executive of Polestar, the electric-car maker backed by China’s Geely, said in a recent interview.
What could be the worst-case scenario?
Many car executives had turned to the experience of Trump’s 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.
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.
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 — which could result in “a tariff-on-tariff” situation.
“The 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,” said Ian Henry, an automotive production expert who runs the AutoAnalysis consultancy.
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.
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.
“There is no reason at all why we . . . absorb any cost like that,” Bratt said at an earnings briefing last week. “Ultimately, it will be higher cost for vehicles sold in the US.”
Which carmakers are most exposed?
The traditional “Big Three” 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.
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.
That would add about $1bn in labour costs, he said, as workers earned more in the US than in Mexico. GM’s 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.
“A billion dollar headwind seems like a manageable scenario right now,” Picariello said.
Investors and analysts were assuming that any tariff on goods from Canada and Mexico would ultimately be negotiated down, he added, because otherwise “the numbers get too large for the industry to properly survive.”
Are German carmakers spared if tariffs are not imposed against the EU?
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’s total revenue.
With all US-sold vehicles from its luxury Audi and Porsche brands manufactured outside the country, Moody’s estimates that a 25 per cent Mexican tariff will reduce Volkswagen group’s global earnings before interest and taxes by more than 15 per cent.
“We have a factory in Mexico and, independently of which administration is at work, our plan is to become stronger in the US,” Audi chief executive Gernot Döllner said last month. But he added: “We think that tariffs are wrong and we believe in free trade.”
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.
“There might be volatile situations that could be less predictable, but I’m really optimistic” about the US, said Jochen Goller, BMW’s board member in charge of customer, brands and sales. “I think it will be one of the growth markets for us in the next year.”
Will Tesla emerge as a winner from Trump’s tariffs?
Investors have pinned hopes that Elon Musk’s close ties to Trump will shield Tesla from the fallout from the president’s policies, but the world’s largest electric vehicle maker is still exposed.
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.
“Over the years, we’ve 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,” chief financial officer Vaibhav Taneja said at an earnings briefing last week, warning of a hit to its profitability from Trump’s tariffs.
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.
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’s political activism.
According to French industry association La Plateforme Automobile, Tesla’s January sales in France were 63 per cent lower than a year earlier.
Which carmakers are the least exposed?
Smaller Japanese automakers, such as Mitsubishi Motors and Subaru, could benefit from a lack of production in Mexico and Canada. Honda is also comparatively well placed, since two-thirds of its US sales are assembled locally, according to Barclays.
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Takao Kato, chief executive of Mitsubishi Motors, told reporters on Monday that tariffs would have little impact on the company and that it could even receive a slight “tailwind” from increased exports to the US if tariffs were not extended to the rest of Asia.
However, he subsequently retracted his comment, saying that “on balance, it looks like there are more headwinds”, and clarified that Japan could benefit if it managed to wriggle out of being the target of heavy tariffs.
Renault is also unlikely to be hard hit as it has no sales in the US or Canada. The French carmaker’s shares dropped just 0.6 per cent on Monday, far below the falls suffered by other European carmakers with greater US exposure.
Renault, one of the few European brands not to issue a profit warning last year, was “doing very well” in Europe,” said Stephen Reitman, an analyst at Bernstein. The company’s exposure to tariffs is through its stake in Nissan, which is currently pursuing a merger with Honda.
But while the company is less exposed than rivals, Reitman added: “There’s not many winners in all of this . . . it’s reducing wealth, which reduces GDP, which reduces car sales.”