How Tariffs Are Hurting the Auto Industry (So Far…)
At the end of April, the total effect on new car prices was estimated to be between $2,000 and $12,000 per car. And at that point, luxury and sport vehicles could still see tariffs that go beyond $20,000 per car. While the effects have been somewhat variable so far (the estimate is now around $5,000 per car), automakers are beginning to validate some of the initial forecasts.1 Among the big 3:
General Motors decided to eat the cost of the tariffs for the last quarter, costing the company $1.1 billion. It expects the total to reach up to $5 billion this year.
Ford took an $800 million hit for the quarter, expecting a total of cost of up to $3 billion for the year.
Stellantis (Chrysler and more) got slammed with $1.7 in tariff charges.
Luxury and sports brands are facing similar challenges: Tariffs have already cost Porsche more than $450 million in the first half of the year.
When you include every automaker that sells in the U.S., the effect has led to tariff losses of more than $11 billion.
This problem has infected the industry down to some of its smallest components: even the hooks used on upholstery are getting hammered by tariffs. There is no escape. Making cars is complicated.
So what’s next? It has become undeniable that exporters do not pay the tariffs. This leaves three reasonable options for automakers trying to sell their cars in America:2
Continue to eat the costs. Many brands are taking this approach over the short-term, but it is unlikely to persist over the long-term because it would eventually crowd out other investments, and shareholders will demand better.
Shift more manufacturing to the U.S. Several brands have already announced plans to do this, but it takes time and it costs money. And if the tariffs went away, then it would be a waste of both.
Raise prices and pass the costs on to consumers. This is the inevitable outcome. Some brands have already committed to this route, but there’s nothing that any company can do to avoid it, because not everything can be made in the U.S. (for example, the upholstery).
Then there is another option that could be coming: cut production. This would be a disaster for such a low-margin, capital intensive business. But it is a possibility. If consumers are unable to accept higher prices, and tariffs raise costs by too much, then the industry will get crushed.
And this doesn’t just affect the automakers. It ripples through the entire auto market. When cars become more expensive, consumers are more likely to consider buying used vehicles or repairing what they already have. Insurers are less likely to “total” damaged vehicles. Insurance rates go up. The price of parts also goes up. Car accessories and add-ons become less attractive.
On the other hand, business performance and stock performance are more complex than just tariffs — certainly in the short-run — and there is more nuance in which companies get hurt the most. But if you look at it from an investment perspective, the question is what the market believes about tariffs.
Right now, the market seems to be rightfully focused on the bigger picture (including management, capital structure, overall financial performance, etc.): GM stock is up about 10% so far this year, while Ford is up around 15%. Stellantis, which has other serious issues, has declined by 30%. If tariffs were the only issue, then all three stocks would be suffering.
But this isn’t over yet. As reported by Reuters, other manufacturers are having similar issues:
Some makers of transportation equipment said conditions were worse than the 2007-09 recession, adding "there is absolutely no activity" and "this is 100 percent attributable to current tariff policy and the uncertainty it has created."
What this means is that, when looking at the impact of tariffs, “so far” is a big statement. Even without tariffs, the auto industry is challenging. There is brand loyalty, but beyond the luxury and sports market, brand loyalty is not enough to overcome the economic reality of what it takes to build a car. When you add the prospect of an industry recession, it starts to look like there might be some tough times ahead.
Apricitas Economics, my preferred source for the specifics of tariff impact, has a really good explanation of the tariffs on automakers.
Cars.com has a broad look at how each carmaker is handling the tariffs.
It seems like the initial eating of tariffs was to appease Trump or at least wait until someone else moved on prices. It's inevitable that the US consumer pays them.