25% US Auto Import Tariffs: A wrecking ball to the Western auto industry
What happened and who are the winners and losers
The automotive space is currently the most disrupted sector in the world : normalisation of profitability after the post covid highs, shift to electric vehicles, rise of Chinese auto makers. You can now add to the list the punishing import tariffs that the US administration has just announced this week.
As an investor, I take a very cautious view of the space at the moment. I prefer staying away from car markers (OEMs) and suppliers and remain exposed through parts/services companies (I will soon publish my LKQ deep dive, one of the most defensive names in the space with a rerating story), automotive semiconductor companies (that are huge gainers from the innovation in the space: digitalisation and electrification of cars).
I will soon release a deep dive into the auto industry going through how I think about investing in the space, what are the various disruptive trends at play and who are the winners and losers in this new era of mobility. I will also explore at a later date the rise of the Chinese auto sector and opportunities linked to their dominance in the new EV era as they control the whole battery value chain today.
What happened?
Yesterday, President Trump announced a 25% tariff on auto imports (effective April 2nd for cars and May 3rd for parts), on top of the existing 25% tariffs on Canada and Mexico and steel and aluminium. The tariffs will apply to fully assembled cars and key automobile parts, including engines, transmissions, and electrical components, and according to the White House will result in $100bn of new annual revenue to the US.
Trump also mentioned that some of the automakers will have to move some of the part supplier plants back to the United States from Canada and Mexico, in some instances into factories in the US which are underutilized, avoiding large investments.
What are those tariffs in short:
Don’t just look at US exposure and production: 25% import tariffs on everything that isn’t US content. Basically 25% on ever car made outside the US (except for USMCA compliant cars (meaning 75% North American sourced parts) for proven US content: which many companies do not know exactly at this time) and 25% on non US content in cars made in the US.
This tariff is applied on the value/cost of the car meaning labor, parts, D&A, reasonable profit margin.
Retaliatory measures are coming: It is also possible that the EU and Asia will take retaliatory measures against the US that could also impact carmakers.
This will have a huge impact given that the automotive value chain is deeply integrated between the US, Mexico and Canada.
The administration seems serious about this as Trump mentioned that those tariffs would stay in effect until at least the end of his mandate. He also mentioned that no concessions should be expected.
Will tariffs really last? The only caveat is that the magnitude of the pain for the sector could force the government to reconsider or make some concessions. A lot of the automotive production (especially from EU carmakers) are in deep red states (South Carolina for BMW or Alabama for Mercedes) with tens of thousands of direct jobs and tens of billions of dollars of exported cars (more than half of the production of these factories) linked to these facilities. Ironically, much of this could be at risk as those facilities not only produce for the US market but make cars (like SUVs) that are then exported worldwide. The Detroit/Michigan area, home to the US Big Three (Stellantis, Ford, GM) would also not be spared.
This will have a cataclysmic impact on the sector
Despite the aim of the US administration being to bring back manufacturing and automotive jobs, the US sector may be hit badly by this new policy. The reality is that 50% of vehicles sold in the US are imported and those made in the US contain 60% of foreign sourced parts (with Mexico being a key country for auto parts).
The tariffs will generate a $110bn impact, around 13% of the industry’s gross profits. Those tariffs could lead to a mid to high single digit % price increase on average (around $6k per car) and a similar impact on volumes sold in the US (which would have dramatic consequences on an industry very reliant on operational leverage).
The impact from tariffs is far deeper and more widespread than what the market expects: To give a sense to the devastation, most OEMs could see from 25% to a >50% of their global annual operating profits wannish from tariffs and reduced volumes due to higher car prices.
And we have not yet seen the possible retaliatory measures put in place by other countries that would likely put automotive companies again in the crossfire.
There will be relative winners and losers
The whole Western auto industry is impacted to a large extent but there are some relative winners and safe havens. There will be a wide range of outcomes for automotive companies, non which are good (except for Tesla). The biggest winners will be the Chinese auto makers which are running away with the electric vehicle crown and taking market share worldwide. We will do a deep dive into the rise of Chinese auto makers and the biggest winners, some of which are Western companies.
Relative winners/benign:
Telsa is meeting the entirety of its US demand with local production and high US content within their cars and are positioned in a sub market with less foreign competition (EVs). Tesla could be the only Western OEM that is an absolute winner from tariffs as car prices could rise faster than their costs, giving them pricing power. On top of that most of their competitors (if not all) source their batteries (close to half of the cost of a car) form abroad (which have just become 25% more expensive)
Ferrari, as a luxury carmaker, is much better positioned to protect its profits. It has quantified an impact of 0.5% of operating margin as it pushes through 10% price increase to mitigate 2/3 of the impact of tariffs.
Renault: the French carmaker is minimally exposed to the US and China, which has become a major positive in the last few years. It has internal catalysts and a strong product roadmap, insulating it more than other OEMs.
Michelin: defensive positioning as a tire producer but more importantly huge US manufacturing footprint (80% of demand produced in US) vs peers like Pirelli (5% of US demand produced locally) meaning it could gain market share.
Truck OEMs like Iveco and Volvo will be less impacted.
All the other US (Ford/GM) and EU OEMs (VW/BMW/Mercedes) are losers from this despite having US production capacity.
Carmakers have already seen their profitability halve since the post covid highs. The tariffs could bring their EBIT margins down a further 2-3% on an annual basis or 1/4-1/3 of the total, slashing valuations by the same amount.
US OEMs: the Big 3 will all be significantly impacted with either large non US car production or high non US content in US made cars. Stellantis may be better positioned as it has significant high US content in its non US production.
EU OEMs: they will be hit hard, losing roughly 25-33% of their EBIT margins on an annualised basis (1.5-3pt impact on margins of 5-8%). BMW was the only automaker that had already incorporated some tariff headwind (Mexico/Canada/China/steel/aluminium) of 1pt for FY25 (5-7% operating margin guidance) but the magnitude of the new US tariffs means that this headwind could go to 2.5pt of margin. Their management is well seen with its Neue Klasse strategy (trying to leapfrog the industry with a best in class EV technology) and a very flexible and visionary strategy.
Worst hit: Volvo Cars with the vast majority of its US car sales imported from abroad and EV startups like Rivian, Lucid and Polestar with significant content coming from abroad (like batteries from South Korea that are close to half of the car cost) will be hit the hardest and could cease operations or exit the US market.
For suppliers, all will be impacted as they have significant footprints in Mexico/Canada. Tires are the only bright spot, especially Michelin with practically its entire demand being met in the US with possible share gains against competitors.
What is the next for the sector
We need to wait for companies to clarify the impact of those tariffs and what measures they can take to reduce the hit (price hikes to partially offset tariffs, move of part of the production to the US if have unused capacity etc). But we expect large downwards earnings revision throughout.
Difficult to move back to the US and will incur costs, either way cars will become more expensive: Companies are unlikely to make large investments in the US despite the punishing new regime due to the uncertainty around how long the tariffs will stay in place. New factories costs billions and take years (2-3 years) to get out of the ground. On top of that costs at these plants would likely be much higher than at existing plants (10-15% higher) which makes it a very difficult decision to take in the face of uncertain tariffs. OEMs and suppliers will try to shift what they can to the US.
Pass through vs eat the cost hike: It is unclear what OEMs will do (Ferrari being in a unique position of being able to pass on the cost increase without a significant volume hit) as car demand is very elastic, especially below $60/car. Car prices in the US could rise significantly, by >$10k/car in certain scenarios.
Could distributors of parts and repair services win out? If car prices rise by this much, the residual value of used car would go up and it would make a lot more sense for car owners to repair their cars, benefiting companies exposed to the distribution of car parts. We will dive into one such company, LKQ very soon.
Suppliers, as always when OEMs need to make difficult choices, will be put under significant pressure and are the most sensitive to auto volumes.
With Western OEMs busy reshuffling their supply chains and dealing with another major shift to their business models (with their loss of market share in China and the delicate transition to EVs), Chinese automakers will continue to take share globally and extend their lead in the EV era. We will explore the opportunities within the Chinese value chain in a later deep dive.
Did this come at a complete surprise or were we expecting that Trump would announce drastic decisions as this one