Auto Firms Fall after Trump Announces 25 Percent Auto Tariffs

Impact on Auto Sector from Trump Tariffs

The introduction of tariffs on USMCA-compliant vehicles has created confusion in US trade rules. While there are hopes that these tariffs may boost domestic manufacturing, automakers face challenges in quickly adjusting production. Compliance with USMCA regulations is complex and varies by manufacturer, impacting their ability to navigate new tariffs. Projections indicate that the auto industry could face significant disruptions depending on the scenario of tariff implementation, with potential declines in North American light-vehicle sales and production.

Our view is that the European Union will have to reduce its tariff rates on automobiles which are higher than the US.  In addition, some progress will probably have to be made on non-tariff policies.  One of the main irritants is the a tax called VAT.  For example, this 20 to 25% is taxed on consumers when they buy an imported US car, but the German government does not require German automobile companies to pay this tax when they export cars to the US.   In the case of South Korea, tariffs are high and the strategy will be to commit to more investments within the US.   Japan will use the same strategy and may also have to open up the Japanese market to more US goods.   

Finally, Trump will play hardball with Canada and to a lessor extent with Mexico to renegotiate the USMCA agreement between the three North American countries.  In the case of Canada, it may be harder to negotiate because on internal protectionist measure between the Canadian providences.  Thus, expect Canada to put more of a fight. 

The graphic  from Statista shows the lobsided tariff rates and trade in cars between the European Union and the United States in 2018 during Trump’s first term in office and the rates have remained the same at the start of his second term. The tariffs in the US on EU automobiles are 2.5% while tariffs in the EU on US automobiles are 10%.   In 2018, this led to an unbalanced trade of the EU exporting 1,155,488 cars worth $43.1 Billion to the US.  The US only exported 267,653 cars to the EU woth $6.3 Billion. 

Key Points  On Auto Tariffs against USMCA Countries – Canada and Mexico

Tariff Implementation: Tariffs on USMCA-compliant vehicles were set to begin on April 2, 2025, with varying impacts on automakers.

Compliance Complexity: Vehicles must meet stringent requirements (75% regional content, wage criteria) to qualify for exemptions from tariffs.

Future Planning Uncertainty: Ongoing trade uncertainties may delay future vehicle development and investment decisions. Expect more commitments of investment from South Korea and Japanese firms as a carrot to Trump to get an exemption.

Production Scenarios:

Quick Resolution (Medium Probability): Short disruption; production losses due to supply issues but recovery expected.

Extended Disruption (High Probability): Longer production halts, inventory conservation, and reduced vehicle sales.

Tariff Winter (Low Probability): Long-term high tariffs create cost inefficiencies, potentially reducing light-vehicle sales from 10% to 15%.

The effects vary widely among companies, influenced by their supply chains and international operations. While Tesla is somewhat insulated due to its U.S.-based manufacturing, other manufacturers like General Motors and Ford face significant exposure due to their reliance on imported vehicles and parts. The article also highlights challenges faced by companies like Volkswagen and Hyundai in adapting to these tariffs.  Recently, Hyundai announced a 20+ Billion USD investment in the US. 

Key Points

• Tesla: Least exposed to tariffs due to U.S. factories, but still reliant on foreign parts and facing declining sales.
• General Motors: Vulnerable due to high imports but financially stable and profitable.
• Ford: Majority of vehicles made in the U.S., but still reliant on foreign parts and facing losses in electric vehicle segments.
• Volkswagen: Risks from tariffs due to imports and struggling sales, especially in China.
• Hyundai/Kia: Making gains in the U.S. market but still affected by tariffs on imports; planning significant investments in U.S. manufacturing.

Analysis of Tariff Impacts

The potential for tariffs to reshape the automotive landscape has led to a mix of strategic responses from automakers. Companies are reevaluating their supply chains and considering adjustments to manufacturing locations to mitigate the increased costs associated with tariffs.

Tesla’s Strategic Position

Tesla’s unique position in the market allows it to navigate these turbulent waters with relative ease. With its Gigafactory in Nevada and plans for expansion in Texas, Tesla reduces its dependence on imported components. However, challenges remain as they still source some parts globally, which could be impacted by tariff changes. The company’s focus on vertical integration and local sourcing aims to buffer against future tariff fluctuations. The price of Tesla shares rose about 5%.

General Motors and Ford’s Challenges

General Motors and Ford, both legacy automakers, face a different set of challenges. While they have made significant investments in electric vehicles, their historical reliance on international supply chains poses risks. GM’s recent strategy includes increasing domestic production to reduce vulnerability to tariffs and enhance its competitiveness in the EV market. Ford is also pivoting towards more U.S.-based manufacturing but grapples with rising costs associated with transitioning to electric vehicles.  GM lost about 7% while Ford which has more US manufacturing fell only by 3%.

Volkswagen’s Global Footprint

Volkswagen’s global strategy means its operations are intricately tied to various international markets. The company has expressed concerns over tariffs affecting its competitiveness in the U.S., especially as it seeks to increase its market share in electric vehicles. Volkswagen is investing in local production facilities, but the transition is complex and requires navigating various regulatory environments.  The stock was down roughtly 1.25% during the day.   Other EU car stocks like Stellantis fell by about 4% while Mercedes-Benz was down by 3%.  

Hyundai and Kia’s Investment Plans

Hyundai and Kia have recognized the need to bolster their U.S. manufacturing capabilities in response to tariff pressures. Both companies are committing to significant investments in new plants, aiming to increase their production capacity within the U.S. This shift not only helps avoid tariffs but also positions them more favorably in the growing market for electric vehicles. Recently, Hyundai announced a 20+ Billion USD investment in the US. 

Future Implications for the Automotive Industry

The potential for tariffs to reshape the automotive landscape extends beyond immediate sales and production numbers. As manufacturers grapple with the complexities of compliance and the uncertainty of trade policies, several key implications emerge:

Investment Decisions: Automakers may delay or alter their investment strategies as they navigate the changing regulatory environment. Uncertainty surrounding tariffs could lead to hesitancy in committing to new plants or technologies, particularly those reliant on cross-border supply chains.

Supply Chain Restructuring: To mitigate risks associated with tariffs, companies might consider restructuring their supply chains. This could involve sourcing more components domestically or from within North America to meet USMCA requirements, potentially increasing costs in the short term but enhancing long-term stability.

Consumer Pricing: Should tariffs be enacted, consumers could face higher vehicle prices as manufacturers pass on increased costs. This could dampen demand, particularly for more budget-conscious buyers, further impacting overall sales.  It is estimated that US cars could cost up to $10,000 more in the worst case.

Market Competition: Domestic manufacturers may benefit from reduced competition from foreign imports due to tariffs, but this could also lead to complacency if not countered by innovation and efficiency improvements. The competitive landscape may shift, favoring those who can adapt quickly to new regulations.

Conclusion

The evolving landscape of trade policies, particularly concerning tariffs on USMCA-compliant vehicles, presents both challenges and opportunities for the automotive industry. While immediate disruptions are likely, the long-term effects will depend on how effectively manufacturers can adapt to regulatory changes, innovate within their processes, and respond to shifts in consumer behavior. As the industry navigates these complexities, proactive strategies will be essential for sustaining growth and competitiveness in a rapidly changing global market.