Autos & TransportationCommodities

Global Car Supply Chain Faces New Crisis in Trump’s Customs War: How Auto Giants Are Responding

The automotive sector is facing seismic challenges that may surpass those experienced during the COVID-19 pandemic, primarily driven by ongoing uncertainties surrounding the global trade environment and customs duties initiated by the Trump administration.

Following a recent executive order that levied a 25% customs duty on imports from Canada and Mexico, along with a 10% duty on goods from China, President Trump promptly paused the implementation of these duties on Mexican imports for a month. This decision came in light of a constructive conversation with Mexican President Claudia Shinbom. Subsequently, Canadian Prime Minister Justin Trudeau secured a similar temporary reprieve with the United States.

Automakers are proceeding with caution regarding significant strategic shifts due to the ambiguity surrounding the long-term implications of U.S. trade and energy policy. Nonetheless, industry giants such as General Motors, Stellantis, and Toyota have indicated intentions to bolster manufacturing within the U.S. to mitigate potential impacts from the customs duties.

Michael Lahechiller, CEO of Pleistar, a Chinese-backed electric vehicle manufacturer, expressed a prudent outlook: “If you start to exaggerate the reaction, it will be a little dangerous now.”

The automotive industry is keenly aware of the worst-case scenarios. Many industry leaders are drawing on experiences from the early days of Trump’s presidency to navigate potential international trade conflicts, noting that prior threats of increased tariffs did not materialize.

Experts in supply chain management warn that an escalation of retaliatory duties could lead to widespread bankruptcies among smaller auto parts suppliers. The intricacies of the global automotive supply chain often result in components manufactured in Mexico being utilized in U.S. factories and vice versa, which raises the risk of a “tariff by definition.”

Ian Henry, an automotive production specialist and head of Auto Analysis Consulting, underscored the potential for complications, stating, “The mechanics of the matter are almost worse than the actual amounts due to the extensive compliance requirements and paperwork involved.” He cautioned that disruptions to supply chains could surpass pandemic-related challenges unless manufacturers can provide adequate financial support to their suppliers.

Should such tariffs be enacted against Mexico, companies will need to discuss the potential of passing increased costs on to consumers.

In a recent earnings call, a company representative emphasized, “There is absolutely no reason that makes us bear such a cost. Ultimately, the cost will be absorbed by the price of vehicles sold in the United States.”

Vulnerabilities Among Major Automakers

The traditional auto manufacturers, particularly those with extensive networks established under the North American Free Trade Agreement (NAFTA) of 1994, are among the most exposed. Analysts suggest General Motors faces the greatest risk, followed by Stellantis, which owns Chrysler. In contrast, Ford appears to be the least exposed, importing a smaller percentage of vehicles from abroad.

General Motors produces the high-margin Chevrolet Silverado at its factories in Silao, Mexico, and Oshawa, Canada, activities that could exacerbate its losses. Analyst James Picarillo from BNP Paribas notes that while GM could potentially shift production of around 300,000 out of 350,000 trucks currently imported to the U.S., this transition could take 12-18 months and would require adjustments in supplier logistics and workforce deployment.

This would incur additional costs estimated at roughly $1 billion due to the higher wages of American workers compared to their Mexican counterparts, which could negatively impact GM’s operating profits by 7%. This scenario is relatively favorable when weighed against the possibility of a 25% tariff leading to a staggering profit reduction of 50%.

“The billion-dollar loss scenario appears to be under control for now,” Picarillo commented. Investors and analysts are assuming that any tariffs affecting goods from Canada and Mexico will ultimately be subject to negotiation; otherwise, “the figures will balloon to a point where the industry cannot sustain itself.”

Challenges for European Manufacturers

European automakers, particularly those in Germany, are already at risk even in the absence of tariffs from the European Union. Volkswagen stands out with 45% of its U.S. sales stemming from vehicles manufactured in Mexico and Canada, despite the American market presenting only a fraction of the group’s total revenues.

Moody’s projects that a 25% customs tariff on imports from Mexico could decrease Volkswagen’s earnings before interest and taxes by over 15%, as its luxury brands Audi and Porsche exclusively manufacture their U.S. offerings outside the country.

Audi’s CEO reaffirmed their commitment: “We have a factory in Mexico, but regardless of the administration, our focus is on strengthening our presence in the United States.” He voiced an opposition to tariffs, advocating for free trade.

BMW, on the other hand, faces the least exposure among German manufacturers, producing 65% of its vehicles in the U.S. Domestic operations also provide a buffer against tariff impacts. Yoshin Goller, a BMW board member, expressed optimism about the U.S. market, stating, “I think it will be one of the growth markets for us next year.”

The Impact on Tesla

Investor sentiment surrounding Tesla posits that the company’s relationship with Trump might insulate it from certain repercussions of his policies. However, even the world’s largest electric vehicle manufacturer is not without risk. Tesla assembles all vehicles for the U.S. market domestically but sources 20-25% of components for its Model 3, Model Y, and Cybertruck from Mexico, as per Barclays Bank insights.

CFO Veephav Taniga acknowledged the vulnerability: “We have indeed attempted to localize our supply chain across various markets, yet we still heavily depend on parts sourced from different regions.” He cautioned that Trump’s customs duties could adversely affect the company’s profitability.

Furthermore, Canada may retaliate with customs duties targeting Tesla. Former Finance Minister Christia Freeland, a candidate for Prime Minister, suggested imposing substantial tariffs on Tesla vehicles as a punitive measure against Musk.

This potential trade conflict coincides with declining Tesla sales in Europe, attributed to a slowdown in demand for electric vehicles and rising competition, coupled with consumer backlash against Musk’s political stances. According to the French automotive association La Plateforme Automobile, Tesla’s sales in France plummeted by 63% year-over-year in January.

Lower-Risk Manufacturers

Japanese automakers such as Mitsubishi Motors and Subaru may find themselves at a relative advantage given their lesser reliance on production facilities in Mexico and Canada. Honda also maintains a relatively positive positioning, with two-thirds of its sales generated from domestic operations, as reported by Barclays Bank.

Mitsubishi Motors CEO Takao Kato informed reporters that tariffs are unlikely to significantly impact the company, potentially even presenting a slight benefit through increased U.S. exports if broader Asian manufacturers are not affected. However, he later tempered his optimism, stating, “Ultimately, it seems there are more headwinds than tailwinds.”

French automaker Renault is positioned well, with no direct sales to the U.S. or Canada, leading to only a 0.6% decrease in shares—significantly less than other exposed European rivals. Analyst Stephen Reteman from Bernstein noted that Renault remained on stable footing in Europe and, while exposed through its stake in Nissan, is notably less at risk than peers, though he warned that overall wealth contraction could detrimentally impact the automotive sector and GDP.

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