The automotive industry is facing its biggest challenge since the economic downturn a decade ago threatened to bankrupt the top three U.S. carmakers.
President Trump is upending the sector with new tariffs on vehicle supplies from steel and aluminum imports to Chinese technological components. He has threatened to impose duties on all products shipped from the communist nation to the U.S., and the White House is weighing a separate 25 percent tax on cars and car parts.
“Industry participants, especially the suppliers but also the vehicle manufacturers, are having to deal with pretty extreme economics that certainly weren’t in their budget at the beginning of the year,” Michael Robinet, managing director of the automotive practice at IHS Markit, told the Washington Examiner. “This is a lot more elongated and significant than anything that we’ve seen before.”
The tariffs are opposed by most businesses, economists and Republican lawmakers who warn they will weigh on a booming economy, lead to price increases for consumers and undermine the benefits of last year’s GOP-led tax cuts. General Motors warned that price hikes and layoffs are looming if tariffs continue, and Volvo and Chinese-parent company Geely delayed plans to launch an initial public offering because of trade uncertainty.
Manufacturers are stockpiling materials as much as possible before tariffs take effect, and companies are in early talks about revamping entire supply chains if the trade skirmishes continue, according to more than half a dozen industry sources.
Automotive supply chains are among the most complex of any industry: Vehicles are transported across borders in various stages of the production cycle and parts come from factories in all areas of the globe. The operations take years of planning to create and hundreds of millions of dollars to launch.
“At some point in the supply chain you’re absolutely going to feel the impact of the tariffs, no matter how you slice it, even for cars that, for the most part, are assembled and produced domestically,” Nick Johnson, head of platform development at Applico, said in a recent interview.
While manufacturers routinely deal with price increases on raw materials and other challenges, experts say Trump’s trade skirmishes are different. Much of the price increases came suddenly, with aluminum costs rising 3.6 percent to $116 a pound in June after the tariffs took effect, according to data from MetalMiner.
“A lot of companies are starting to bulk up in terms of inventory to get ready for any tariffs that are coming down the pike,” said Michael Armanious, vice president of sales and marketing at the Datex Corporation. “We’re seeing a larger need for transportation, for warehouse space, an uptick in inventory across the board.”
Ford, General Motors and Fiat-Chrysler Automotive declined to comment.
The White House, meanwhile, has argued the increased pressure on China and U.S. allies like Canada and Mexico will spur new trade deals that reignite American manufacturing, and the auto industry won a partial reprieve when the U.S. and Mexico reached a tentative pact to revamp part of the North American Free Trade Agreement.
Under the broad contours of that deal, 40 percent to 45 percent of a vehicle must originate from factories with wages over $16 per hour, and manufacturers will be required to produce 75 percent of a vehicle in North America to avoid any tariffs, up from a prior 60 percent.
Canada, however, has yet to sign on and any deal excluding the country would be a major blow.
Trump is hoping that the new arrangement will force automakers to increase their production in the U.S. Industry; sources doubt that will happen but say some European and Asian companies could bolster their American presence to meet the requirements.
The White House’s other actions on trade — namely the 10 percent tariff on aluminum imports, 25 percent levy on steel imports and duties on as much as $500 billion in Chinese goods — will still have drastic consequences, they warn.
While some effects may take years to manifest, trade tensions are already weighing on the performance of domestic carmakers in China, a key growth market. Fiat-Chrysler sales in the Asia-Pacific region fell 33 percent in the three months through June to roughly $755 million, spurred by a slowdown in the country. GM’s sales dropped 3 percent, and Ford reported a $483 million loss in the region.
“The decline was driven by unfavorable market factors for Ford and Lincoln imports in China and continued negative industry pricing,” Ford Chief Financial Officer Bob Shanks told investors in July. “The lower net pricing also includes adverse stock-accrual effects driven by price changes in response to tariff changes.”
Companies can make small shifts to production to accommodate the trade headwinds, initially, but lingering uncertainty would require more difficult and costly decisions.
“Before a company is going to move a plant or move production across the border or in and out of the country, they have to understand where the dust is going to settle,” Armanious said. “There’s going to be a period of time where it’s going to be extremely painful.”
Changing an aspect of the automotive supply chain is a complicated endeavor. Suppliers for each component in the car — from the part that allows the seat to slide forward and back to the airbags — are carefully chosen. Numerous tests are conducted to ensure that the piece functions properly.
Changing suppliers would require the carmaker to restart that process from scratch, potentially costing millions of dollars and resulting in months of lost output. Suppliers most at risk will be those unable to pass along price increases.
Larger manufacturers “will stomach this for a period of time but they’re not going to stomach this forever,” Robinet said. “It is not trivial. There are some suppliers that are really feeling it right now.”
